The Fed said it was cutting its key federal funds rate by 50 basis points to 1.5 percent. China, the European Central Bank (ECB) and central banks in Britain, Canada, Sweden and Switzerland also cut rates in the coordinated response which analysts had been demanding.
U.S. stock index futures leapt on the news and world stock markets trimmed their losses.
Before the rate cut, stock markets across the world had continued their downward spiral amid the worst financial crisis in nearly 80 years and fears of a global recession.
"The fact that we have got them coming across the board suggests that this is the end game," said Peter Dixon, an economist at Commerzbank in London. "Will it help the markets? Questionable in the short term."
The cuts followed days of calls for concerted action by economists and world leaders after repeated attempts by central banks to inject liquidity into world markets failed to halt a crisis of confidence.
"The central banks of the world have finally woke up to the gravity of the current situation," said Charles Diebel, the head of interest rates strategy at Nomura. "This is a major step to convincing the world that they are serious about stabilizing."
Britain had earlier offered to pump at least 50 billion pounds ($87.2 billion) into its biggest retail banks to help them survive the crisis.
British Prime Minister Gordon Brown said the global financial market had ceased to function after bad debts stemming from a collapse in the U.S. housing market poisoned the system.
Hong Kong had earlier followed Australia’s lead in slicing a full point off its interest rates amid increasingly strident calls for a coordinated, global monetary policy response.
The U.S. approved a $700 billion package last week to rescue its ailing banks — although its stock market has continued to plunge — and governments across the globe are now pushing ahead with their own emergency measures.