Relief and jubilation swept through the City yesterday as shares bounced back with a record gain at the end of a week that had spread fear and panic across the global economy.

The value of British shares rose by £112 billion as America rushed out a string of measures to restore confidence in the banking system. The move by Hank Paulson, the US Treasury Secretary, will cost the American taxpayer billions of dollars, but he said that it would have cost them much more had he not acted. “We’ve been to hell and back in just a week,” the head of trading at one City bank said.

Mr Paulson’s decision to buy US banks’ “toxic assets” will be one of the biggest bailouts in memory. It came as people began to doubt the safety of $3.35 trillion in money market funds — accounts used like large deposit accounts by millions of Americans.

“That was the piggy bank cracking,” Justin Urquhart Stewart, of Seven Investment Management, said. “If they hadn’t acted, you’d have seen a panic in America that would have made Northern Rock look like an ice-cream queue.”

Markets around the world responded with record jumps. In Britain, the FTSE 100 index rose 471 points to 5,311, its biggest one-day gain. The Dow Jones in New York closed up nearly 370 points, or 3.35 per cent.

Analysts said that the bailout would help to stabilise financial institutions, limit company failures and save jobs — Britain employs well over half a million people in the finance industry. And while they cautioned that it would not prevent a sharp economic downturn in much of the West, including Britain, they said the move would help to stop it spiralling into something much nastier and more prolonged.

Ultimately the measures should make it easier for people to find mortgages and bring down interest costs, but there was no sign of improvement yesterday in the key markets that determine mortgage availability and costs. Indeed, financial advisers expect home loan rates to rise next week.

Mr Paulson’s measures involved taking over banks’ hard-to-trade assets, a $50 billion boost for the money market funds and a ban on speculators betting that bank share prices will fall — a move taken by authorities in Britain on Thursday. The total cost is likely to be at least on the scale of the $500 billion scheme that resolved the Savings & Loans disaster of the late 1980s.

Mr Paulson said: “I am convinced that this bold approach will cost American families far less than the alternative: a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion.”

President Bush described the measures as “essential” and a “pivotal moment for America’s economy”.

In Britain, Alistair Darling said that authorities were also doing more. The Bank of England would double to more than £100 billion the amount available to banks under its Special Liquidity Scheme. Bank shares posted eye-popping gains. Royal Bank of Scotland was up 31 per cent, Barclays up 29 per cent and HBOS, which agreed to a £12 billion rescue takeover by Lloyds TSB on Thursday, was up 28 per cent. Some hedge funds are expected to have been badly wrong-footed, leaving them nursing heavy losses.

Gerard Lyons, chief economist with Standard Chartered, applauded the US moves. “A do-nothing scenario would have seen a financial markets meltdown, a much worse recession and the whole world suffer.” But other analysts pointed out that shares were still worth less than a week ago. Mohamed El-Erian, of the bond fund Pimco, said the plan may be too late to repair the damage suffered by the US economy and financial system.

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