(Update) Wall Street made its highest single day gain for five years after the US Federal Reserve acted to prevent the country slipping further into recession by slashing interest rates by 0.75% to 2.25%.

The DowJones Industrial Average closed overnight up 3.51% or 420.41 points at 12,392.66. The market had initially greeted the rate cut cautiously before rallying again in afternoon trading. Earlier, the market had been buoyed by better than expected first quarter results from Goldman Sachs and reassuring noises about liquidity from Lehman Brothers which had been rumoured to be having serious difficulties.

The decision was passed by eight votes to two by the Federal Reserve's policy making Federal Open Market  Committee and leaves the benchmark overnight lending rate at its lowest level since 2004. The two dissenting committee members had voted for a less drastic 50 basis point cut.

It is the sixth consecutive cut in rates by the Federal Reserve taking it down from 5.25% last September, although some market commentators were pricing in a full percentage point cut.

The Federal Reserve warned that economic activity had weakened further over the last month with financial markets remaining under considerable stress.

The move follows the Federal Board's decision to also cut the discount rate for direct loans to banks by 0.75% to 2.5%.