European markets on Thursday recovered some of Wednesday's hefty losses after a relatively steady performance in Asia overnight, with British banking stocks in particular enjoying a strong rally in the wake of the government's 500 billion pound (US$865 billion) rescue plan.

European jitters appear to have been calmed by Wednesday's simultaneous interest rate cuts from the world's key central banks, even though lending between financial institutions remains limited.

"European equity markets have bounced back this morning, and in that regard there is some sense of normality returning but money markets remain frozen," said Neil Mackinnon, chief economist at ECU Group.

By mid-morning London time, Germany's DAX was 136.99 points, or 2.7 percent, higher at 5,150.61, while France's CAC-40 was up 110.85 points, or 3.2 percent, at 3,607.74. The FTSE 100 index of leading British shares was also 136.90, or 3.1 percent, higher at 4,503.59.

Britain's benchmark index was helped higher by a positive reaction to the British government's rescue package, with shares in the two most troubled banking stocks gaining plenty of ground. HBOS PLC stock was up 36 percent, while Royal Bank of Scotland added 18 percent.

The goverment pledged some 50 billion pounds to buy stakes in the country's major banks, as well as underpinning bank finances by a further 450 billion pounds (US$778 billion).

"We are seeing a rally in British financials from the lows seen yesterday but there is still an unfolding economic crisis in the background," said ECU Group's Mackinnon.

It wasn't just British banking stocks doing well today. In Germany, Hypo Real Estate Holding AG, which has received a government-sponsored rescue, was up more than 12 percent, Commerzbank AG bounced more than 9 percent and Deutsche Bank AG was nearly 6 percent higher.

And the news that the governments of France, Belgium and Luxembourg will give struggling lender Dexia SA a yearlong guarantee on its new loans and deposits, sent the company's shares soaring by 18 percent.

No one in the markets though is willing to call an end to the turmoil that has gripped stock markets over the last few days, until banks start lending to each other and money market rates decline and spreads narrow.

"There's so much uncertainty as to what happens next and such a great reliance on seeing those interbank rates come down that until we see any real progress here, normality in equity markets does still seem to be some way off," said Matt Buckland, a dealer at CMC Markets.

The pressures will remain for some time, according to U.S. Treasury Secretary Hank Paulson, who warned that further banks in the world's largest economy will fail despite the US$700 billion bailout package agreed by U.S. lawmakers just last week.

The nationalisation of Kaupthing, Iceland's largest bank, has also fueled concerns about the viability of the financial sector in Europe.

Asian markets were mixed overnight as investor enthusiasm over Wednesday's rate cuts around the world was tempered by ongoing fears about the strains in the credit markets and the prospect of a deep global recession, which would hit Asian exporters hard.

South Korea, Hong Kong and Taiwan followed the lead of the world's leading central banks and lowered their interest rates too.

Tokyo's benchmark Nikkei 225 index rose more than 1 percent but fell back to close down 0.5 percent to 9,157.49, a five-year low. That followed a 9.4 percent plunge Wednesday, its biggest one-day drop since the 1987 market crash.

Hong Kong's Hang Seng index gained 3.6 percent to 15,985.39, while South Korea's key index rose 0.6 percent after earlier rising as much as 2.9 percent.

Mainland China's main index fell 0.8 percent as investors continued to unload shares in banks and property firms even after its central bank lowered rates Wednesday.

In Indonesia, trading on the Jakarta Stock Exchange was canceled Thursday after the benchmark JSX index sank 10.4 percent Wednesday before trading was suspended by late morning. Authorities ordered the market to stay closed, possibly through Friday, following a late night Cabinet meeting.