Wall Street stocks snapped a two-day skid Thursday on expectations that a weakening US economy will prompt more forceful action from the Federal Reserve, while London shares fell on British recession fears as the country prepares to leave the European Union.

US stocks initially dove after a closely-watched measure of services sector activity in September fell to a three-year low. The report from the Institute for Supply Management came on the heels of jobs and manufacturing data this week that exacerbated recession fears.

But stocks quickly shook off that gloom as markets bet the Fed would step in with more stimulus, analysts said.

Futures markets now overwhelmingly expect an interest rate cut later this month after being divided on that question earlier in the week.

The Dow Jones Industrial Average finished at 26,201.04, up 0.5 percent, after swinging more than 450 points during the session.

FTN Financial's Chris Low, who has called for aggressive action from the Fed, said the slowdown in the services sector confirmed "serious" economic headwinds.

"The Fed missed their September opportunity, but it is not necessarily too late to act forcefully in October," Low said. "Keep kicking the can with timid policy responses for too long, however, and there will be a recession."

Investors will have fresh data to weigh on Friday with the key monthly government jobs report. Analysts expect the US added 150,000 jobs in September, while unemployment held steady at 3.7 percent.

Brexit woes continue

In Britain, the IHS Markit/CIPS UK services purchasing managers' index fell to 49.5 in September from 50.6 in August, falling below the key 50-point threshold that indicates contraction.

The services report follows PMI surveys showing output also fell in construction and manufacturing.

"With downbeat data pouring in from all angles and across both sides of the Atlantic, investors are struggling to find much to cheer," said City Index analyst Fiona Cincotta.

The data came one day after Prime Minister Boris Johnson issued his "final" Brexit proposals and warned that Britain would leave the EU without a deal on October 31 if they were not accepted.

EU Council President Donald Tusk, who will chair a make-or-break October 17-18 EU summit dominated by Brexit, tweeted a message to Johnson: "We remain open but still unconvinced."

Key figures around 2040 GMT

New York - Dow: UP 0.5 percent at 26,201.04 (close)

Federal Reserve boss Jerome Powell said the bank 'will act as appropriate' to support the economy
Federal Reserve boss Jerome Powell said the bank 'will act as appropriate' to support the economy GETTY IMAGES NORTH AMERICA / ALEX WONG

New York - S&P 500: UP 0.8 percent at 2,910.63 (close)

New York - Nasdaq: UP 1.1 percent at 7,872.26 (close)

London - FTSE 100: DOWN 0.6 percent at 7,077.64 (close)

Paris - CAC 40: UP 0.3 percent at 5,438.77 (close)

Frankfurt - DAX 30: Closed for a public holiday

EURO STOXX 50: UP 0.1 percent at 3,417.37 (close)

Tokyo - Nikkei 225: DOWN 2.0 percent at 21,341.74 (close)

Hong Kong - Hang Seng: UP 0.3 percent at 26,110.31 (close)

Shanghai - Composite: Closed for a public holiday

Euro/dollar: UP at $1.0969 from $1.0959 at 2100 GMT

Pound/dollar: UP at $1.2340 from $1.2303

Dollar/yen: DOWN at 106.87 yen from 107.18 yen

Brent North Sea crude: UP less than 0.1 percent at $57.71 per barrel

West Texas Intermediate: DOWN 0.4 percent at $52.45 per barrel