Heightened investor expectations of a U.S. rate cut next month soothed financial market volatility on Thursday as a Bank of Japan policymaker said some of the turbulence had been overdone.

In a letter released on Wednesday, U.S. Federal Reserve Chairman Ben Bernanke said the Fed was prepared to act as needed to ensure credit market turmoil did not harm the economy.

But the Wall Street Journal's Fed watcher Greg Ip, without quoting specific sources or explicitly suggesting a rate cut was in doubt, said the central bank was in no rush to lower rates because it wanted to disabuse investors of the view that it was there to bail them out.

They hope that taking time to weigh the economy's need for rate cuts will help discourage investors from thinking Fed officials are overly concerned with falling asset prices, his article said.

A senior OECD official also urged caution, saying the Fed should avoid aggressive rate cuts purely to rescue investors who had made bad decisions related to high-risk U.S. subprime lending mainly to poor people.

If the Fed thought ... the economy was going to go into recession, then it would be appropriate to cut interest rates, Adrian Blundell-Wignall, deputy director of the OECD, told reporters at a conference outside Paris.

If the Fed cuts interest rates because of this financial crisis, to me that's a bad policy, he said.

Bank of Japan board member Atsushi Mizuno, the lone advocate of a BOJ rate rise at the last two policy meetings, said a September 18 cut in U.S. rates would change the basis of discussion in Japan but not necessarily rule out a BOJ rate rise the next day.

Calming the panic in financial markets was the most immediate task, Mizuno said in a speech to business leaders in central Japan, adding that the Fed's cut in its discount rate earlier this month was an example of such action.

To my eyes, there is market confusion that went beyond rational repricing (of risk), he said.

European equities climbed but U.S. stock futures fell as investors grappled with the mixed views about the Fed's intentions.

All eyes will now be on Bernanke's keenly-awaited speech on Housing and Monetary Policy on Friday.

The Fed will have to cut 25 basis points on September 18 because expectations of a cut seemed to have stabilized asset prices, said Nick Parsons, head of market strategy at nabCapital.

MIXED NEWS FROM BANKS

Shares in French bank Natixis gained 7 percent after it posted a rise in first-half net profit and said it had cut its financing to subprime originators in the United States.

Peer Credit Agricole rose 2.5 percent after it said the subprime crisis had a limited impact on it.

But Royal Bank of Scotland said it was cutting back its collateralized debt obligations team following a drop in market appetite, confirming the departure of a leading executive.

CDOs, which pool together underlying assets and then issue notes backed by cash flows from those assets with varying degrees of risk, have been hit by convulsions in the global credit market that have battered values.

U.S. tax adviser H&R Block Inc said it was renegotiating the sale of its money-losing Option One Mortgage Corp subprime lending unit to Cerberus Capital Management LP, casting doubt on its ability to complete the transaction.

RATING AGENCIES UNDER FIRE

In Japan, German Chancellor Angela Merkel launched a broadside at ratings agencies, which have been criticized for contributing to the market confusion by being too slow to warn about the problems in the U.S. mortgage sector.

If we look at how the mortgage crisis happened, we have often experienced that what was rated highly in the end turned out to be much more unstable, she said.

Tightening credit market conditions were evident in Australia where the central bank injected extra cash into the banking system due to upward pressure on bank bill rates.

Money markets are not functioning, said a currency forwards trader at a big Japanese bank in Tokyo.

Central banks have poured funds into money markets to tackle a liquidity crisis, stemming from the subprime saga, which has made many banks clam up on normal interbank lending.

The Bank of England said it had lent 1.556 billion pounds ($3.14 billion) through its standing facility on Wednesday.

Borrowing via the facility, which has already been tapped 14 times this year, does not necessarily indicate an institution is in trouble. Market participants said problems with the CREST settlement system may have been to blame.

Japan Ben Bernanke Royal Bank of Scotland