The People's Bank of China cut its key lending rate by 0.25 percentage points to 4.6% in an effort to calm stock markets after two days of turmoil.
It is the fifth interest rate cut since November and will take effect on Wednesday.
The move has boosted global share prices further, with London's FTSE 100 jumping 3%, whileGermany's Dax gained 5% and the Paris Cac rose by 4.1%.
Other European markets, including Lisbon, Madrid, Moscow and Milan, all closed sharply higher.
But Wall Street bucked the trend. Having initially surged all three main stock indexes in the US reversed sharply in the final hour of trading.
The Dow Jones index eventually closed 1.3% lower, while the S&P 500 dropped 1.4%.
The People's Bank said that the interest rate cut was to reduce "the social cost of financing to promote and support the sustainable and healthy developments of the real economy".
It also acted to increase the flow of money in the economy by cutting the amount of cash banks must keep in reserve, effectively freeing them to lend more cash.
The move has boosted global share prices further, with London's FTSE 100 jumping 3%, whileGermany's Dax gained 5% and the Paris Cac rose by 4.1%.
Other European markets, including Lisbon, Madrid, Moscow and Milan, all closed sharply higher.
But Wall Street bucked the trend. Having initially surged all three main stock indexes in the US reversed sharply in the final hour of trading.
The Dow Jones index eventually closed 1.3% lower, while the S&P 500 dropped 1.4%.
The People's Bank said that the interest rate cut was to reduce "the social cost of financing to promote and support the sustainable and healthy developments of the real economy".
It also acted to increase the flow of money in the economy by cutting the amount of cash banks must keep in reserve, effectively freeing them to lend more cash.
The central bank's move was broadly welcomed by economists.
A research note from JP Morgan stated: "China's decision to cut... will be regarded by many investors as overdue. The litmus test will come overnight, however, and the efficacy of the... cut in boosting the domestic stock market."
Singapore-based investor Jim Rogers said he thought the panic over the Chinese market would be over soon: "I haven't sold any Chinese shares. A couple of days ago, when they really collapsed, I bought more. Of course I'm losing money now on those.
"That kind of panic selling usually means the bottom is coming and I would suspect before too much longer the bottom will be in place."
Growth fears
The Chinese authorities have taken a number of steps to help stem stock market losses since the market began a series of heavy falls in June.
Earlier, China's falling stock market had hit markets around the globe on Monday, and - although Asian markets were again hit overnight - European stocks had already opened in a more optimistic mood on Tuesday.
A research note from JP Morgan stated: "China's decision to cut... will be regarded by many investors as overdue. The litmus test will come overnight, however, and the efficacy of the... cut in boosting the domestic stock market."
Singapore-based investor Jim Rogers said he thought the panic over the Chinese market would be over soon: "I haven't sold any Chinese shares. A couple of days ago, when they really collapsed, I bought more. Of course I'm losing money now on those.
"That kind of panic selling usually means the bottom is coming and I would suspect before too much longer the bottom will be in place."
Growth fears
The Chinese authorities have taken a number of steps to help stem stock market losses since the market began a series of heavy falls in June.
Earlier, China's falling stock market had hit markets around the globe on Monday, and - although Asian markets were again hit overnight - European stocks had already opened in a more optimistic mood on Tuesday.
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