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The market is starting to price in the possibility of the Reserve Bank moving more quickly than expected to lower official interest rates.

The speculation comes amid turmoil on world markets, with a fire sale of troubled US investment bank Bear Stearns arranged by the US Federal Reserve slamming European and Asian markets with gaping losses.

An index of top European shares was down 3.4 percent, having pared losses from an earlier decline of 4.4 percent, while Japanese stocks fell to about a 2-1/2 year closing low, with the Nikkei average falling 3.7 percent, dragged down by exporters worried about a rising yen.

But to the surprise of many, the Dow Jones industrial average actually ended up slightly, and losses on the broader US market were considerably smaller than those in Japan or Europe.

The performance of Wall Street was seen as offering hope the New Zealand sharemarket will not continue the trend of yesterday, when the NZSX-50 benchmark index plummeted 2.1 percent.

That took its losses since last October's peak to beyond 20 percent, taking it into bear market territory -- typically defined by a fall of 20 percent or more from a 12-month high.

Today Andrew Kelleher of ASB Securities said he was fairly negative last night on the New Zealand sharemarket's prospects for this week.

But with the Dow staging a late surge, some stability was returning to the US market, he told Radio New Zealand today.

Obviously people were reassured the Fed would do everything it could to ensure liquidity was sufficient to meet what was a short term confidence issue.

It was good to see some confidence, although it was still only tentative, Mr Kelleher said.

While this country did not have the same issues as the US market did, the tentacles of what started as a subprime issue in the US were now reaching out into what he would call the prime markets.

"In other words, good quality borrowers are now being affected by the subprime crisis," he said.

New Zealand relied on imported capital which professional funders could still source offshore, but the cost of it was going up.

"It's going to be hard for our interest rates to come down for the local consumer while the cost of sourcing credit is going up," Mr Kelleher said.

"Although I note in the last 24 hours there's now sort of talk in the market that perhaps the Reserve Bank will think about easing our interest rates a little bit earlier.

"That's certainly what the market is starting to price in, whether or not that comes to fruition we just don't know, but interesting change in sentiment there."

Overnight global markets were driven by fear that the Fed's move to back JPMorgan in taking over Bear Stearns reflected a widening of the worldwide credit crisis that could engulf other banks and market participants.

The US dollar tumbled and investors piled into the safety of government debt.

"The markets are in a complete state of panic and in such situations there is no such thing as valuation or value in any asset," said Michael Klawitter, FX strategist at Dresdner Kleinwort in Frankfurt.

In a shock move yesterday, the Fed lowered the discount rate it charges on direct loans to banks to 3.25 percent from 3.50 and implemented steps to provide cash to a wider range of financial firms, using tools last used in the Great Depression.

Investors are now nearly fully pricing in a 1 percentage point cut in the main federal funds rate at or before the Fed's policy meeting tomorrow. That would take US rates down to just 2 percent.