WASHINGTON -- The Federal Reserve tried to calm roiling financial markets on Friday, cutting the rate it charges banks for loans from its discount window and warning that falling stocks and increased uncertainty "have the potential to restrain economic growth going forward."

The Fed's unexpected cut in its discount rate from 6.25 percent to 5.75 percent sent the Dow Jones Industrial Average soaring by more than 300 points in early trading, a swing so volatile that it kicked in electronic curbs on trading.

At noon, the Dow was up 132.99 points to 12978.77.

The discount rate is a short-term interest rate that banks pay for borrowing from the Fed. Banks generally don't use it much because funds typically are available cheaper elsewhere, but Friday's action made it easier for troubled lenders to borrow from the Fed as a last resort. The Fed also allowed repayment to stretch out to 30 days or beyond; usually discount loans are repaid in 14 days.

By cutting the discount rate, Fed Chairman Ben Bernanke effectively threw a lifeline to large struggling mortgage lenders such as Countrywide Financial, which underwrites nearly one in five home mortgages. Countrywide is trying to stave off bankruptcy, as it is unable to sell its loans into the secondary mortgage market, which has seized up.

On Thursday, Countrywide announced it was drawing on a massive $11.5 billion line of credit from major banks, which analysts said amounted to a final effort to stay solvent. The Fed rate cut gives struggling lenders a means to take out short-term loans if needed.

The Federal Open Market Committee (FOMC), the Fed's policy-setting body, said in a statement Friday morning that "financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward ... The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets."

Friday's rate cut followed the Fed's injection of more than $50 billion into the nation's banking system over the past week to help ensure that there was ample cash for lenders' short-term needs. Banks had grown wary of lending in light of spreading concerns that bad loans rooted in mortgage markets threatened bank balance sheets.

Historically, a cut in the discount rate foreshadows a cut in the Fed's federal funds rate, which is a benchmark for bank loans to consumers and businesses. Friday's discount-rate cut raised hopes that the Fed's policy-making body could cut its fed funds rate by 50 basis points to 4.75 when it next meets on Sept. 18.

For now, the Fed is taking smaller steps to help calm markets.

"They're doing all this liquidity stuff first, because all that stuff is reversible," said Nigel Gault, an economist with consultancy Global Insight of Lexington, Mass. By "liquidity stuff," Gault referred to the Fed's short-term pumping of money into the banking system, which it is able to reverse quickly once calm is restored.

"You're not going to reverse overnight a formal cut in the federal funds rate," Gault observed.

Housing is at the center of today's Wall Street crisis. Fears about massive defaults on sub-prime mortgages, those given to borrowers with the weakest credit histories, have spread to virtually all home loans. These fears have spread to the market for commercial paper, which are short-term notes issued by corporations to finance expansion and other business needs. Because of widespread fear that bad loans are far more extensive than is yet known, investors are shunning the purchase of new debt, so finance is drying up for business expansion, which threatens the broader real economy beyond Wall Street.