By Blaise Robinson
PARIS (Reuters) - Stock index futures rose strongly on Tuesday, pointing to a tentative recovery from Wall Street's record slide in the previous session after U.S. lawmakers rejected a $700 billion financial sector rescue plan.
By 4:36 a.m. EDT, S&P 500 futures were up 2.7 percent, Dow Jones futures up 1.8 percent and Nasdaq 100 futures were up 2 percent.
After sinking by as much as 2.6 percent in early trade, European shares reversed course to turn slightly positive by mid-morning, with banking stocks trimming their losses.
"It's certainly my working assumption that there is some sort of agreement reached in the U.S. and based on that I would expect the market to recover quite strongly from yesterday's sell-off," said Darren Winder, equity strategist at Cazenove.
"It's a softish day. But equities are now getting to extreme valuations where fundamentally there is an awful lot of value."
Monday's turbulent market reaction increased the pressure on U.S. lawmakers quickly to give the green light to the bailout legislation and sparked expectations that the Federal Reserve would cut interest rates on or before its next meeting, which is scheduled for October 29.
"The rate option is now very much in play and Fed officials could cut or signal their intention to do so. A 50bp cut is now anticipated," Societe Generale analysts wrote in a note.
Fed fund futures showed a 68 percent probability of a 50 basis point cut in interest rates in October.
The Dow industrials plunged 778 points on Monday, its largest point decline in history, and posted its biggest daily percentage slide since the 1987 stock market crash.
U.S. President George W. Bush was scheduled to make a statement on the rescue package at 1245 GMT on Tuesday after meeting on Monday with economic advisers including Federal Reserve Chairman Ben Bernanke to consider the administration's next move.
The House of Representatives voted 228-205 against a compromise bailout plan. House Republicans, in particular, balked at spending so much taxpayer money just before the November 4 U.S. elections.
The Senate returns on Wednesday and the House on Thursday after a break for the Jewish New Year holiday of Rosh Hashanah. No laws can be passed in their absence but their staffs could work on a revised plan.
On Tuesday, investors will keep an eye on Chicago PMI data (1345 GMT) and consumer confidence data (1400 GMT), both for September, for insight on the outlook for the economy.
The median forecast of economists polled by Reuters put the Institute for Supply Management-Chicago's index at 53.0, down from 57.9 in August. The estimates ranged from 49.0 to 57.5. Most observers believe activity in the Chicago region remains hurt by weakness in the automotive and housing sector, rising unemployment and high gasoline prices.
Companies reporting earnings on Tuesday include Pepsi Bottling Group.
(Additional reporting by Dominic Lau in London ; Editing by Paul Bolding)
