NEW YORK, US - Stocks finished lower Wednesday as the market rallied but then reversed course in volatile late-day action following a half-point cut in interest rates by the Federal Reserve.

The market leapt higher on news of the rate cut, aimed at stimulating a sputtering economy, but failed to keep its momentum.

The Dow Jones Industrial Average dropped 37.47 points (0.30 percent) to close at 12,442.83, squandering a 200-point rally.

The market action came as the Federal Reserve slashed its base federal funds rate a half-point to 3.0 percent in its second cut in eight days to help an economy that some say is on the brink of recession.

The action extends an aggressive effort to ease borrowing costs and comes a week after an emergency cut of 0.75 percentage points in the face of a global market rout and concerns the US economy was sinking fast

Analysts at Briefing.com said the selloff in the final hour came after a report suggesting a credit downgrade for major bond insurers, seen as a key part of the global financial system.

"Selling activity quickly accelerated in the wake of these developments and it was pretty much a one-way trade in the final 30 minutes of the session," the Briefing.com analysts said in a note to clients.

The initial reaction to the Fed cut was positive.

Stephen Gallagher at Societe Generale said the Fed's action was aimed at "restoring normal credit flows in the economy that have been hampered since the banking crisis began in mid-August."

"The ability for financial institutions to raise capital is critically important for supporting the economy. The Fed is now fully supporting this recovery and signals further cuts," Gallagher said.

Some say the Fed may be overreacting to markets.

"Ironically the more successful the Fed is in stabilizing the economy the more of an inflation problem it will have and the sooner it will have it," said Robert Brusca at FAO Economics.

The Commerce Department reported earlier Wednesday a dramatic slowdown in US economic growth in the fourth quarter, rising by a weak 0.6 percent annualized rate.

This stoked fears about a recession, although some analysts said the slowdown was exaggerated by an inventory drawdown, and that lower interest rates and an economic stimulus package would ease the downturn. Europe?s main stock markets closed lower as investors digested more bad news for banks from the US subprime crisis, with Swiss bank UBS hit hard.

In London, the FTSE 100 index closed down 0.81 percent at 5,837.30 while in Paris, the CAC 40 index lost 1.37 percent at 4,873.57 and in Frankfurt the DAX was down 0.26 percent at 6,875.35.

Among key stocks on Wall Street, Yahoo slid 8.5 percent to 19.05 dollars after the Internet giant reported fourth-quarter results that mainly exceeded expectations but offered a weak outlook for 2008.

Boeing climbed 2.4 percent to 82.87 dollars after reporting record profits for 2007.

Kellogg fell 1.03 percent to 49.11 dollars after the cereal giant reported a drop in quarterly earnings but called for growth in the coming year.

Bonds fell. The yield on the 10-year US Treasury bond increased to 3.733 percent from 3.658 percent Tuesday and that on the 30-year bond rose to 4.433 percent against 4.336 percent. Bond yields and prices move in opposite directions. --AFP