Shares leapt on both sides of the Atlantic yesterday after market hopes that the Federal Reserve will try to calm credit conditions with further interest rate cuts were boosted by soothing comments from the US central bank’s vice-chairman.

Stock markets surged in London, New York and across Europe after Donald Kohn, No 2 to Ben Bernanke, the Fed’s Chairman, said that policymakers must be “flexible and pragmatic” in responding to continued stress in financial markets.

In a clear effort to reassure fretful markets amid signs of resurgent credit strains, Mr Kohn said that recent turbulence had “partly reversed some of the improvement in market functioning over the late part of September and in October”.

Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses, he said.

The comments were taken by investors as a signal that the Fed stands ready to step in with fresh injections of capital into US markets, and possible further interest rate cuts, to stabilise credit conditions.

The remarks also helped to calm Wall Street amid more bad news on the US economy, as sales of US homes hit a record low in October.

The fallout from financial turmoil was emphasised by an announcement from Bear Stearns, the investment bank, that it will cut 650 jobs, or 4 per cent of its global workforce, in a round of cost-cutting to offset heavy losses from its losing bets on the US sub-prime home loans sector.

Only 20 of those posts are expected to go in London, where the bank employs 1,500 people.

In New York, the Dow Jones industrial average jumped by 331 points, or 2.55 per cent, to close at 13,289.40, while the broader-based S&P 500 index rose by 2.65 per cent.

In London, the FTSE 100 index rose 165.5 points, or 2.7 per cent, to close at 6,306.2, adding more than £39 billion to the value of Britain’s blue-chip companies. Germany’s Dax index rose 2.6 per cent, and France’s CAC40 was up 2.3 per cent.

Earlier, the reemergence of credit stress in the markets was high-lighted after strong demand in an auction of three-month funds by the European Central Bank saw those loaned to Europe’s commercial banks at a hefty 4.7 per cent, the highest rate since April 2001.

Pressure on the Bank of England to follow the Fed and ECB and inject extra funds into money markets in London mounted as credit strains saw three-month “Libor” rates for lending between UK banks pushed to their highest since late September, at 6.59 per cent, after a steady climb since November 12.

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