Global money markets were racked by fresh convulsions yesterday as Henry Paulson, the US Treasury Secretary, and Ben Bernanke, Chairman of the Federal Reserve, struggled to persuade America’s sceptical lawmakers to pass their $700 billion (£378 billion) bailout plan for Wall Street.

Severe strains in the markets for short-term lending between banks were reignited by mounting anxieties over the fate of the rescue scheme as it ran into resistance in Congress.

Growing market alarm over the repercussions should the scheme be rebuffed also sparked a renewed flight by investors for the sanctuary of short-term US Treasury bills.

Shares succumbed to another sell-off. In London, the FTSE 100 index closed down 40 points at 5,095.6. The Dow Jones industrial average closed down 29 points at 10,825.20.

The mounting pressure over the bailout was underlined as John McCain, the Republican presidential candidate, said that he was suspending his campaign to return to Washington to help with the negotiations.

Mr Paulson and Mr Bernanke implored lawmakers to approve the plan swiftly. In his latest plea, the Fed chief said: “Action by Congress is urgently required to stabilise the situation and avert what could be very serious consequences for our financial markets and economy. Choking of credit is taking the lifeblood away from the economy.”

Mr Paulson urged Congress to support his rescue package “I understand that this is an extraordinary ask, but these are extraordinary times,” he said. It emerged last night that he was willing to accept limits on executive pay at banks using the proposed bailout fund in an attempt to push the Bill through.

The rescue plan won backing from Jack Welch, the respected former chairman of General Electric: “Thank God we have Bernanke [and] Paulson. We have to act. I now believe we are in for one hell of a deep downturn.”

There was also reassurance for fearful investors from Warren Buffett, the billionaire investor, as he sank $5 billion of investment into a stake in Goldman Sachs in what was widely interpreted as a vote of confidence in the new landscape on Wall Street.

However, Mr Buffett sounded a warning that markets remained in a “dangerous situation”. “I am, to some extent, betting on the fact that the Government will do the rational thing and act properly,” he said.

The revived strains on the capital markets were highlighted by a sharp rise in the rates charged for lending between banks in sterling, dollars and euros, despite fresh injections of short-term funds by the Bank of England and European Central Bank.

Interbank rates for three-month euro funding hit 5.0625 per cent, their highest since late 2000. In sterling markets, rates for overnight funds climbed to 2.95 per cent, from 2.6875 per cent on Tuesday, while three-month sterling rates rose to 5.0 per cent, from 4.5 per cent a day ago.

The spread between the three-month rate for dollar loans between banks and expected future Fed rates rose to a record 1.65 per cent. In the Treasury bill markets, investors’ fear of risk was highlighted as the yield on one-month T-bills briefly dipped below zero, while three-month T-bill rates dropped below 0.5 per cent.

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