European stock markets rose on Tuesday, shrugging off sharp losses across Asia and a day earlier on Wall Street, as a record fall in eurozone producer prices raised expectations of a sharp ECB rate cut, traders said.

Heading into afternoon trade, London rose 0.23 percent, Frankfurt jumped 1.36 percent and Paris climbed 0.13 percent.

"Given sharply diminishing inflationary pressures and the ever growing threat of extended, deep eurozone recession, we believe there is a compelling case for the ECB to slash interest rates by 100 basis points from 3.25 percent to 2.25 percent on Thursday," said IHS Global Insight analyst Howard Archer.

Eurozone producer prices fell at their sharpest rate on record in October following another big drop in energy costs, official data showed Tuesday.

Producer prices plunged 0.8 percent month-on-month in October, the biggest monthly drop since records began in 1990, leaving them 6.3 percent higher on the year, European Union statistics agency Eurostat said.

As well as the ECB rate meeting, traders were anticipating a big cut to British borrowing costs when the Bank of England gathers on Thursday.

A steep interest rate cut by Australia's central bank on Tuesday and fresh steps by Japan to tackle the credit crunch failed to soothe investor fears across Asia.

Tokyo closed down 6.35 percent, Hong Kong slid 5.0 percent, Seoul shed 3.3 percent and Sydney dropped 4.2.

US manufacturing slumped to a 26-year low in November, highlighting the abrupt downturn in the world's biggest economy, a survey showed on Monday.

The National Bureau of Economic Research (NBER) said the US economy had been in recession since December 2007.

Wall Street stocks had plunged on Monday, giving back most of their gains from the past week. The Dow Jones Industrial Average sank 7.70 percent, the Nasdaq composite plummeted 8.95 percent and the broad-market Standard & Poor's 500 index sank 8.93 percent.

"We believe that last week's stock rally went too far and markets were ripe for a correction," said Dariusz Kowalczyk, chief investment strategist at CFC Seymour in Hong Kong.

Investors were also spooked by a report in the Wall Street Journal that investment bank Goldman Sachs -- which has fared better than many rivals during the financial crisis -- is likely to post a quarterly loss of as much as two billion dollars.

Australia's central bank slashed interest rates by 100 basis points -- a larger cut than expected that dropped the official cash rate to 4.25 percent, its lowest level in more than six years.

But the rate cut "didn't do anything to boost the market," said CommSec market analyst Juliette Saly.

Japan's central bank meanwhile outlined new measures to make it easier for commercial banks to borrow money using corporate debt as collateral, aiming to unclog credit markets that are vital to the economy.

In the 15-nation eurozone, an index of manufacturing activity hit a record low of 35.6 points last month, data revealed Monday.

"I have never before seen a financial system that has been in pain for so long," said Chuo Mitsui Trust Bank strategist Yosuke Hosokawa.

"Markets are wondering whether the negative situation will deepen further. My impression is that the recession will last for quite a while," he added.

Investors were also keenly watching developments over the fate of the Big Three US carmakers, whose executives return to Washington this week to plead again with lawmakers for financial lifelines to help them survive.

Finance ministers from the 15 countries sharing the euro have meanwhile failed to commit to a proposed 200-billion-euro (260 billion dollars) economic stimulus target while agreeing they need a joint anti-recession package.

- Dow Jones Newswires contributed to this story -