LONDON (AFP) - Wall Street and European stocks rallied Thursday, despite steep Asian losses, as the world's central banks pumped billions of dollars into money markets in a bid to bolster investor confidence.

London was also lifted after British bank Lloyds TSB agreed a takeover for rival HBOS -- which became the latest victim of the credit crunch, joining casualties that include AIG, Lehman Brothers and Merrill Lynch.

New York stocks rose at the open Thursday as the massive liquidity effort appeared to calm investors a day after a feverish rush to safe-haven assets including gold, oil and US Treasury bills.

The world's top central banks, led by the US Federal Reserve, announced a huge operation to offer hundreds of billions of dollars to desperately tight money markets as global financial turmoil ripped deeper into confidence.

The Dow Jones Industrial Average jumped 1.27 percent in the first trades a day after a rout that saw the blue-chip index lose 4.1 percent.

"For the time being, this (central bank action) has stabilised the financial system," said Andrew Busch at BMO Capital Markets.

The Fed announced a 180 billion-dollar liquidity line to fight the global financial crisis and said it was ready to do more.

The move came in coordination with other leading central banks to pump cash into the financial system amid a credit squeeze that has dried up lending among commercial banks.

"The news that the central banks are teaming up to fight the credit crunch head on is giving us a lift," said CMC Markets dealer Ian Griffiths in London.

"One thing is for certain and that is that we will continue to see big swings in the equity markets until the dust starts to settle."

In Europe, markets drew strength from news that Lloyds TSB had tied up a rescue takeover deal that valued HBOS at 12.2 billion pounds (15.4 billion euros, 21.8 billion dollars).

London's FTSE 100 index of leading shares gained 0.86 percent in late afternoon trade as HBOS shares rocketed 34.1 percent, with market overall having lost almost 10 percent in the first three days of the week.

Elsewhere on Thursday, Paris was up 1.43 percent and Frankfurt added 1.12 percent near the half-way stage.

Despite the gains, economic storm clouds continued to threaten markets after a tumultuous week that saw the collapse of US investment bankLehman Brothers, the sale of Merrill Lynch and HBOS, and the rescue of insurer AIG.

Prior to news of the central bank plan, Asian stocks had plunged as investors fled the markets on fears that more banks will go under in the worst financial turmoil markets in decades.

Asian markets mostly took a battering.

Hong Kong shares closed flat, recovering from a 7.4-percent morning dive, as investors there took reassurance from the central bank liquidity plan.

Tokyo lost 2.2 percent as the Nikkei hit its lowest close in more than three years. Sydney fell 2.4 percent, near a three-year bottom. Taiwan dropped 2.7 percent and Seoul shed 2.3 percent. Shanghai shed 1.72 percent.

Shares in Morgan Stanley and Goldman Sachs -- the last two major Wall Street investment banks standing following the recent upheavals -- plunged dramatically in US trade on Wednesday.

The Wall Street Journal and New York Times reported that Morgan Stanley, whose stock fell to its lowest level since 1998, was mulling a merger with Wachovia, a US commercial bank.

Many market-watchers have blamed short-sellers for driving down the market and the US Securities and Exchange Commission announced new restrictions effective Thursday to limit the practice.

Russia's stock market suspended trading for a third day on Thursday after the bourse suffered its worst fall since the 1998 financial crisis. Trading is due to resume Friday.

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