Leading central banks continued to wage a desperate battle to calm the financial turmoil yesterday, announcing huge immediate and future injections of funds to try to unblock money markets that were near to seizing up.

Fears are rising that the increasing stranglehold on funding is spilling into nonfinancial businesses, prompting two leading British business lobby groups to call on the Bank of England to reduce interest rates sharply on Thursday.

The US Federal Reserve was again in the forefront of the fight to quell the upheaval, backed by the Bank of England, the European Central Bank (ECB), and other central banks from Kuwait to Canada. The Fed said that it would make $900 billion (£516 billion) of end-of-year, medium-term loans available to US banks in the latest expansion of its now vast injections of liquidity into America’s financial system. The US central bank will expand the funding offered in its 28-day and 84-day injections through its Term Auction Facility to $150 billion each.

The Fed also moved immediately to exploit its new right, under last week’s emergency economic measures agreed by Congress, to begin paying interest on reserves held with it by US banking groups. This step is crucial since it will hugely expand the Fed’s financial firepower, effectively removing practical limits on its ability to inject liquidity into financial markets.

In further moves yesterday, the Bank of England and the ECB injected a combined $60 billion of overnight loans to banks into the system. With the moves appearing to do little to stem the turmoil, however, pressure was increasing among investors and analysts for the authorities on both sides of the Atlantic to take more drastic, concerted and systemic action to prevent the crisis growing still further. The cost of borrowing dollars for three months in the interbank market rose to 4.33 per cent, its highest since January, although overnight rates dropped.

Market expectations are running high that this week the Bank of England will begin a series of moves by central banks across the world to cut interest rates to underpin economies and prevent the turmoil tipping into a global recession.

The CBI and the British Chambers of Commerce (BCC) urged the Bank to cut rates by a half-point to 4.5 per cent. The calls came as panic-hit investors fled the markets, unconvinced by the US Government’s $700 billion bailout plan or by individual governments’ vows to prop up their banking systems.

The pan-European FTSEurofirst 300 index fell 7.8 per cent to close at 1,004.90 points. Manoj Ladwa, senior trader at ETX Capital, said: “Black Mondays used to be a once-a-decade event – now they’re coming along more regularly than a London bus.”

Shares in Paris dived 8 per cent and Japan’s Nikkei closed at a four-year low. Trading in Russia, Brazil and Peru was temporarily halted after huge losses.

There were big gyrations in currency markets. Concern over the strength of the European banking system sparked widespread selling of the euro, with the dollar surging to a 13-month high against it. The pound also suffered, tumbling to a 2½year low against the dollar at $1.73. Sterling also fell to six-year low against the yen, as investors sought the haven of Japan’s low-yield, but low-risk, currency.

Richard Fisher, the Federal Reserve Bank of Dallas president, said capital markets were in “semi-panic” mode.

The BCC said that failure to cut UK rates significantly would worsen the economic downturn, and increase the chances of the financial difficulties becoming more deeply embedded in the wider economy. David Kern, economic adviser to the BCC, said: “Without forceful and urgent corrective action, there is a serious danger that the recession will deepen and cause huge damage. The MPC must cut interest rates without delay with a half per cent cut on Thursday.”

There is hope that falling oil prices, which went below $89 a barrel yesterday, may free the Bank’s hand to cut rates. This would be some comfort to beleaguered homeowners who were dealt another blow yesterday as Abbey said it was raising its mortgage rates by 0.15 per cent. Cheltenham & Gloucester, the mortgage arm of Lloyds TSB, said it was raising rates on buy-to-let deals by up to 0.5 per cent.

The ECB is now expected to cut rates as soon as next month, if not forced into emergency action earlier. The Fed is increasingly expected to cut US official rates at the end of this month, if not before.

In the US, the President’s Working Group on Financial Markets, a body of regulators, said that the crisis meant policymakers needed to use all tools available “in forceful and coordinated ways . . . throughout the world”.

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