The US stock markets rallied yesterday for the first time since the September 11th attacks on the World Trade Centre and the Pentagon, regaining a quarter of last week's losses.

The more bullish sentiment saw the Dow Jones Industrial index registering its fifth largest single-day points gain on record to close up 367.63 at 8603.44. The Nasdaq composite index was up 75.85 at 1,499.04.

Stocks surged from the opening bell as confidence returned after the weekend passed without any serious incident nationally or internationally, and airlines were rescued from near bankruptcy with a $15 billion (€16.4 billion) aid package that President George W Bush signed on Saturday.

On Friday, worries about the collapsing profits of many companies in the wake of the attacks and rumours of new attacks timed for Saturday weighed heavily on the Dow and the Nasdaq. The week ended with the blue-chip Dow declining by 14.25 per cent and the Nasdaq by 16 per cent. But as sentiment improved yesterday, airline stocks rebounded after seeing huge losses last week because of a steep drop in airline travel.

Airline shares also bounced back in Europe and Asia as other governments stepped in to guarantee war-risk insurance.

Insurance company shares also recovered on the basis of a Washington plan to aid the insurance industry and make the government the insurer of last resort for terrorist attacks.

There was also much bargain hunting as analysts declared that the market was deeply oversold.

One of Wall Street's more bullish analysts, Goldman Sachs chief investment strategist Ms Abby Joseph Cohen, told investors it was the time to "stand up and buy stocks", and recommended buying stocks in health care, consumer staples and utilities.

The S&P 500 index of the most popularly traded US companies climbed back above the psychological 1,000 barrier early in the session, having closed below that on September 20th for the first time since October 1998. The drumbeat of bad economic news continued in the background however.

A key forecasting gauge for the US economy fell in August for the first time since March, indicating that economic uncertainty would have deepened even without the attacks.

The Conference Board said that the economy might well slow in the aftermath of the catastrophe. The travel, entertainment and amusement sectors weakened since September 11th and "economic demand seems likely to slow," the board's economist Ken Goldstein said.

Brendan McGrath, Markets Editor, adds: European stock markets finally reversed almost two weeks of declining stock prices, but there was little confidence among investors that yesterday's rebound represented the beginning of a sustained recovery.

Stock prices on European markets rose sharply from the opening bells, with Dow Jones and Nasdaq futures indicating that the New York markets would open at least 2 per cent firmer after the 10 per cent falls of last week's trading.

All the pan-European stock indices, which are based on blue-chip stocks across Europe were up sharply, with the FTSE Eurotop index of Europe's top 300 companies up more than 5 per cent. The FTSE-100 closed more than 4 per cent higher while the Paris and Frankfurt markets regained almost 6 per cent.

The Irish market benefited from the improvement in sentiment although financial shares, which rose more than 7 per cent in the morning session, lost a good portion of those gains in the afternoon session.

Turnover in Irish shares, however, was low and dealers said that there was no rush from fund managers into the Irish market even though many shares were now trading on what seemed on the surface to be very modest earnings multiples.

The ISEQ Index regained almost 2.5 per cent after its 17 per cent fall following the September 11th bombings.

"Stocks look cheap but given the uncertainty over American retaliation for the bombings, it's a brave fund manager who's going back into the market in any size. You'll probably find some bargain-hunting but I don't think you're going to see any broad-based rally until some certainty returns to the market. It's going to be pretty volatile," according to one Irish fund manager.