The Reserve Bank of Australia surprised markets when it slashed its key rate a full percentage point to 6 percent - its biggest cut since 1992. Analysts had expected a half-point cut.
The move sent Sydney's S&P/ASX-200 index, which had opened 3.7 percent lower, up 1.7 percent to 4,618.7.
Other markets rebounded after the bold move: Main indices in South Korea, Singapore and Taiwan all edged higher, staunching - at least temporarily - the gut-wrenching global market sell-off Monday.
Unlike its Australian counterpart, the Bank of Japan announced it was keeping its interest rates unchanged at 0.5 percent, as expected. However, there is growing speculation that the BOJ may soon coordinate with the U.S. Federal Reserve and the European Central bank in an emergency policy move aimed at shoring up investor confidence.
"I suspect we'll be seeing other rate cuts before too long from other central banks," David Cohen, head of Asian economic forecasting at Action Economics in Singapore, said after the Australian move. Cohen added that he expects equities markets to be subject to "some pretty rough sailing for awhile yet."
Japan's benchmark Nikkei 225 index erased some of its early losses to close down 3 percent at 10,155.90 - still its lowest level in almost five years.
"Sentiment was really pessimistic as investors were worried over the course of the financial crisis," said Masatoshi Sato, a strategist at Mizuho Investors Securities Co. Ltd. "No one knows how and when this crisis ends."
But some investors in Japan said they were encouraged by aas well as overall sentiment that stocks had fallen too far too fast, said Toshikazu Horiuchi, equity strategist at Cosmo Securities.
"There was a sense that the market was oversold," he said.
European markets opened lower Tuesday after gut-wrenched plunges the day before when Britain's FTSE 100 index slid 7.9 percent and France's CAC-40 sank a stunning 9 percent, its worst performance ever.
Shares in European banks were dealt a fresh beating Tuesday, particularly in Britain, where several major banks lost as much as 30 percent of their share value before midday.
Iceland's government took control of the struggling Landsbanki bank, authorities said Tuesday.
Despite rumors and reports in the British media that the bosses of all major
U.K. banks were talking to the government Tuesday morning about possible cash infusions to shore up their capitalization, Barclays and HBOS insisted they were not seeking a cash handout. Both of those banks saw their shares fall severely in trading on Tuesday.
"As declared by the government, all domestic deposits are fully guaranteed. Landsbanki's domestic branches, call centers, cash machines (ATMs) and Internet operations will be open for business as usual," the Financial Supervisory Authority said in a statement.
As pressure on the 27 leaders in the European Union bloc grew to take a cohesive, coordinated action to shore up the credit markets, most stock exchanges in Europe fluctuated back and forth near the zero mark.
London's FTSE and Germany's DAX bourses were less than one percent down and in Paris, the CAC index was up by about half a percent.
Ireland's finance minister said Tuesday the European Union was mulling increasing government guarantees for private savings in banks across the 27-nation bloc.
Irish Finance Minister Brian Lenihan said savings of up to euro100,000 ($135,000) would be guaranteed by EU governments.
Until the outbreak of the credit crunch crisis most EU governments guaranteed consumer savings of up to between euro20,000 and euro25,000 ($27,00 to US$34,000).
The plan is meant to assure consumers that their savings are safe and was being debated by EU finance ministers Tuesday in Luxembourg. They were also debating ways to curb sky-high bonuses for underperforming executives of financial institutions.
The summit was the second attempt to form a consensus among EU leaders on the credit crisis. A summit in Paris during the weekend failed to produce a pan-Europe solution.
U.S. stock index futures were higher, suggesting that trading in New York might open higher Tuesday morning. Dow futures were up 0.8 percent to 10,047.
RBA Gov. Glenn Stevens said the Australian central bank had judged that a large cut in the cash rate was needed after studying the outlook for global growth and its likely effect on Australia.
"Conditions in international financial markets took a significant turn for the worse in September," he said in a statement, highlighting bank failures and "heightened instability" in markets. He also noted evidence of "a significant moderation in growth in Australia's trading partners in Asia."
Still, investors remain jittery.
"It's very hard to anticipate how long the repair job is going to take across financial markets at the moment," said Jamie Spiteri, senior dealer at Shaw Stockbroking in Sydney.
Japanese automakers were among the biggest losers, partly due to the dollar's drop to 101 yen level overnight. Mitsubishi Motors Corp. fell 10.3 percent, Nissan Motor Co. fell 4.79 percent and Toyota Motor Corp. dropped 4.87 percent. On Tuesday, the dollar recovered to 102.85 yen.
In South Korea, investors steadily bought back shares after the sharp early drop, with the Korea Stock Price Index closing 0.5 percent higher at 1,366.1.
The euro was trading at US$1.3595 from US$1.3516 late Monday.
Oil prices rebounded to above US$90 Tuesday in Asia after plunging to an 8-month low Monday on concerns a significant slowdown in global economic growth will undermine demand for crude.