The U.S. central bank has cut its key interest rate by 0.75 percent to try to ease an ongoing U.S. credit crisis and prevent a recession in the world's largest economy.

Tuesday's move by the Federal Reserve reduces the rate to 2.25 percent, its lowest since February 2005. In a statement accompanying the decision, the Fed said the lower growth in the economy remains a concern and also said uncertainty over inflation remains. The key rate, known as the federal funds rate, is the rate banks charge each other for short-term loans.

U.S. stocks were sharply higher in anticipation of the rate cut, and continued to increase through the afternoon.

U.S. stocks also got a boost from U.S. investment banks Goldman Sachs and Lehman Brothers, which said quarterly profits fell less than analysts had expected.

The results reassured many investors only two days after U.S. investment bank Bear Stearns was forced to sell to rival bank JPMorgan Chase in a rescue deal engineered by the Federal Reserve.

U.S. Treasury Secretary Henry Paulson acknowledged Tuesday that the U.S. economy is experiencing a sharp downturn. He says U.S. policymakers are working to prevent financial market turbulence from worsening the economic situation. On Sunday, the Fed cut its direct lending rate to financial institutions, known as the discount rate, by 0.25 percent and by another 0.25 percent Tuesday to 2.5 percent.

Major stock indexes in London, Frankfurt and Paris closed up around three percent, while benchmark indexes in Tokyo and Hong Kong closed up more than one percent.