LONDON (AFP) - World stock markets bounded upwards on Thursday, with Asian indices soaring by about 10 percent, as a US interest rate cut and prospects for reductions elsewhere sparked bargain hunting after months of misery. US stocks opened with a bounce, following strong gains in Europe, with the Dow Jones Industrial Average up 2.16 percent to 9,184.91 in opening trades and the Nasdaq 2.30 percent stronger at 1,695.26. The rise came despite news that the US economy contracted at a 0.3 percent pace in the third quarter as a global credit crunch prompted consumers and businesses to retrench. The drop in gross domestic product (GDP) was the first since a negative figure in the fourth quarter of 2007, the Commerce Department reported in the first of three estimates on overall economic output. But the decline was not so steep as the 0.5 percent annualised drop expected by private economists. The action on Wall Street came a day after a mostly lower session for US stocks in extremely choppy trade after the Federal Reserve, as widely expected, slashed its key interest rate by a half point for the second time this month to a historic low of 1.0 percent to ease a credit squeeze. Analysts said the Fed signaled it was leaving the door open to further rate cuts in the face of a sharp slowdown in the world's biggest economy. It also opened credit lines to central banks in Brazil, Mexico, South Korea and Singapore. China, Hong Kong and Taiwan also lowered rates as part of efforts to avert a financial system meltdown and speculation swirled that Japan's central bank may follow suit. "Rate cuts by other central banks, the Fed's new currency swap line provided to key emerging market economies, better-than-expected earnings results from ExxonMobil, and a continued drop in LIBOR rates are helping to underpin a bullish bias," Patrick O'Hare at said. In Europe, the Frankfurt market gained 4.18 percent, London was up 2.05 percent and Paris rose 2.12 percent in mid-afternoon deals. "Last night's (US) rate cut... will have encouraged more (investors) to move from cash into equities as they hunt out a better yield," added Iain Griffiths, a dealer with CMC Markets in London. "Although with the fundamental economic outlook still weak, stocks may well remain constrained," he warned. Cautioned Joshua Raymond, City index market strategist: "We have made some good gains recently but we are by no means out of the woods. "It certainly looks like the buyers are ready to enter the market, which is a very positive sign, but they are doing it in small bursts at the moment which means any consistent rally will take time." He added that there were now "clear indications from the Bank of England and Jean Claude Trichet (head of the European Central Bank) that rate cuts are on the cards next week. We are expecting an aggressive rate cut for the recession- entrenched UK, especially following the greater than expected contraction of GDP. However, this is by no means a certainty ..." Earlier in Asia Hong Kong shares rocketed 12.8 percent and Tokyo surged 9.96 percent " the fourth-biggest gain ever as a weaker yen provided a boost to exporters. Seoul surged 11.95 percent, their biggest ever rise, and Singapore won 7.8 percent after the Fed reached a currency swap deal with central banks of South Korea, Singapore, Brazil and Mexico to help them cope with the credit crisis. Asian investors welcomed interest rate cuts in the United States, China, Hong Kong and Taiwan, and there was speculation Japan's central bank might follow suit. Japan's central bank is also reportedly considering reducing its super-low interest rates to just 0.25 percent this week. "It is apparent that major central banks have come to the conclusion that aggressive monetary easing is required to support growth," said economist Lee Hardman at The Bank of Tokyo-Mitsubishi UFJ in London. "Furthermore, the threat posed from upside inflation risks has been replaced by downside risks to price stability leaving plenty of room for monetary easing. Japan's Prime Minister Taro Aso unveiled on Thursday a nearly 300 billion-dollar package for Asia's largest economy to weather the global economic crisis, signalling he would hold off on high-risk elections. The package includes tax cuts, benefits sent directly to households and loans for small business.