China cut borrowing costs for the first time since 2008 and loosened controls on banks' lending and deposit rates, stepping up efforts to combat a deepening slowdown as Europe's debt crisis threatens global growth.

The benchmark one-year lending rate will drop to 6.31 per cent from 6.56 per cent effective tomorrow, the People's Bank of China said on its website today.

The one-year deposit rate will fall to 3.25 per cent from 3.5 per cent.

Banks will get extra freedom to set the amounts they pay on deposits and charge for loans in a move UBS AG calls a ?milestone?.

European stocks and US index futures extended gains as China?s move added to an Australian rate cut this week and expressions of concern from European and US central bank officials that fanned expectations for more stimulus.

The announcement, two days before China is due to report inflation, investment and output figures, may signal that the economy is weaker than the government expected.

"This will be the beginning of a rate cut cycle and there will be at least one more reduction this year," said Shen Jianguang, a Hong Kong-based economist with Mizuho Securities Asia Ltd.

Bloomberg