Citing "heightened instability" in markets, the Reserve Bank of Australia slashed its key rate by 1 full percentage point to 6 percent. Analysts had expected a half-point cut. The move sent Sydney's S&P/ASX-200 index up 1.7 percent to 4,618.7 after opening down 3.7 percent.
Other markets seemed to react positively to the bold move: Main indices in South Korea, Singapore and Taiwan all edged higher, perhaps staunching a global market sell-off Monday.
Japan's benchmark Nikkei 225 index erased some of its early losses to closed down 3 percent at 10,155.90. Earlier, it had plunged over 5 percent to below 10,000 for the first time in almost five years.
Unlike its Australian counterpart, the Bank of Japan announced it was keeping its interest rates unchanged at 0.5 percent, as expected. However, there is growing speculation that BOJ may soon coordinate with the U.S. Federal Reserve and the European Central bank in an emergency policy move. Some analysts say its unlikely Japan would reduce its key rate because it is already so low.
Earlier Tuesday, Bank of Japan injected another 1 trillion yen ($9.9 billion) into the money market in its 15th straight day of emergency operations to foster smoother lending among banks.
Investors in Japan said they were encouraged by a late day rally on Wall Street Monday as well as overall sentiment that stocks had fallen too far too fast, said Toshikazu Horiuchi, equity strategist at Cosmo Securities.
"There was a sense that the market was oversold," he said.
The Dow Jones industrial average, down more than 800 points at one point Monday, recovered in the final 90 minutes of the session to finish down 370 points, or 3.6 percent, to 9,955.50, its first close below 10,000 since 2004.
U.S. stock index futures were higher, suggesting that trading in New York might open higher Tuesday morning. Dow futures were about 1 percent higher at 10,059.
RBA Gov. Glenn Stevens said the Australian central bank had judged that a large cut in the cash rate was needed after studying the outlook for global growth and its likely effect on Australia.
"Conditions in international financial markets took a significant turn for the worse in September," he said in a statement. He also noted evidence of "a significant moderation in growth in Australia's trading partners in Asia."
Investors remain jittery amid signs that the credit crisis was spreading to Europe, where troubled banks have needed bailouts.
"It's very hard to anticipate how long the repair job is going to take across financial markets at the moment," said Jamie Spiteri, senior dealer at Shaw Stockbroking in Sydney.
In Europe on Monday, leading bourses were battered. London's FTSE 100 index slid 7.9 percent and France's CAC-40 sank a stunning 9 percent, its worst performance ever.
In South Korea, investors steadily bought back shares after the sharp early drop, with the Kospi gaining 0.5 percent in afternoon trading to 1,366.10.
Japanese automakers were among the biggest losers, partly due to the dollar's drop to 101 yen level overnight. Nissan Motor Co. fell 4.9 percent, and Toyota Motor Corp. slid 4.8 percent. On Tuesday, the dollar recovered to 102.85 yen.
The euro was trading at $1.3595 from $1.3516 late Monday.
Associated Press writers Jay Alabaster and Tomoko A. Hosaka in Tokyo and Tanalee Smith in Sydney contributed to this report.