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American stocks rose sharply today in early trading after the US Federal Reserve calmed investors by agreeing to provide $180 billion (£100 billion) worth of funding to the global banking system.

Leading US stocks rose by more than 150 points after the bell sounded on Wall Street, sending the Dow Jones industrial index up to 10,761.3. By the afternoon, however, it had retreated back to 10642.67, a rise of just 46 points.

President George Bush said today that markets are adjusting to “extraordinary measures the government has taken on the economy", adding that he and his advisers are working on measures to promote stability.

President Bush, who scrapped an out of town meeting to monitor the situation, will later meet Hank Paulson, the US Treasury Secretary.

However, despite President Bush's bid to encourage financial stability, Morgan Stanley, one of the two last remaining US investment banking banks, saw its shares fall another 25.61 per cent to $16.18 after yesterday's record 24 per cent fall.

Speculation is gathering that Morgan Stanley could be the next US bank forced into a rescue deal, and is understood to be holding merger discussions with Wachovia, America's fourth-largest bank.

Goldman Sachs, the other remaining US investment bank after Lehman Brothers collapsed on Monday and Merrill Lynch was acquired by Bank of America, also saw its shares decline again today, falling by 13.74 per cent.

Earlier today, the Fed joined the Bank of England and four other of the world's most powerful central banks agreed to pump $180 billion (£100 billion) into the world's financial system.

The US Federal Reserve is lending the Bank of England, the European Central Bank (ECB), the Swiss National Bank and the central banks of Canada and Japan billions of dollars to pump into their financial systems.

It is the first time that the Bank of England has injected dollars into the overnight borrowing markets and comes just days after the collapse of Lehman.

Yesterday, the Bank extended its Special Liquidity Scheme by a further three months “in view of the current disorderly market conditions".

The scheme, which lets banks exchange some of their riskier holdings for Treasury bonds, was due to end next month but will now run until January 30.

The Bank has pumped £25 billion into the money markets this week already, having made £5 billion available on Monday and a further £20 billion the following day.

The $180 billion is equivalent to a fifth of the British Government's annual spending of £500 billion or three times the personal fortune of the world's richest man, Warren Buffett.

The cost of dollar borrowing between banks has soared since Monday when Lehman filed for bankruptcy and Merrill Lynch was rescued by Bank of America.

AIG, the US insurance giant, has since been forced to seek $85 billion in funding from the Federal Reserve. Today's emergency funding has calmed overnight funding rates, with dollar borrowing falling from 5.03 per cent to 3.84 per cent.

Instead of lending each other money in the wholesale market, banks have hoarded cash, pushing up the price of borrowing and putting more pressure on already stretched financial institutions.

The Bank of England could pump in $40 billion to the UK, while the ECB could inject as much as $110 billion into the markets.

The move represents the latest effort by central banks worldwide to open up the short-term money markets, which have stubbornly remained shut despite the efforts of international regulators.

Problems accessing capital on the money markets was central to the demise of Northern Rock, the British mortgage lender.

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