Ben Bernanke, the Chairman of the US Federal Reserve, fuelled a global fightback by battered stock markets yesterday, boosting hopes that Washington will soon order new tax cuts and extra public spending to shore up the faltering American economy.

Mr Bernanke's explicit backing for fresh “fiscal stimulus” measures to bolster US growth, combined with rising optimism that the global financial turmoil may be abating, drove a resurgence in shares on both sides of the Atlantic.

With signs emerging that the seizure in money markets is beginning to ease, the London market led a powerful rally by leading blue chips across Europe. The FTSE 100 index soared by 219.7 points, or 5.4 per cent, building on Friday's 5.2 per cent surge, to close at 4,282.7. In France the CAC40 leapt by 3.6 per cent, and the German Dax index jumped by 1.1 per cent.

In New York, the Dow Jones industrial average closed the session up 413.21 points, or 4.67 per cent, at 9,265.43, and the broader-based S&P500 added 44.85 points, or 4.77 per cent, at 985.40.

Shares worldwide gathered strength as radical bank bailout measures across the industrial nations of the West began to revive confidence and investors' expectations grew that further economic stimulus measures from many governments would follow soon.

Mr Bernanke stoked expectations of more US tax cuts or extra public spending measures to follow the $100 billion (£58.4 billion) handout to taxpayers ordered by Congress last summer in an effort to breathe extra life into American growth. As the effect of the earlier move fades, US consumer spending has flagged once more, with retail sales falling for three months in a row.

“With the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate,” the Fed chief told the Budget Committee of the House of Representatives. Mr Bernanke warned Congress that, although Washington's rescue package for US banks and Fed measures had shown “encouraging signs” of easing the credit crisis, they would not prevent further economic fallout.

“The stabilisation of the financial system, though an essential first step, will not quickly eliminate the challenges still faced by the broader economy,” he said.

The White House also lent support to the idea of fresh fiscal stimulus moves. “We'll remain open to the idea,” Dana Perino, the spokeswoman for President Bush, said. Last week Nancy Pelosi, the Speaker of the House of Representatives, reinforced pressure from Congressional Democrats for new stimulus measures when she said that a hearing would be held in the coming weeks to debate action. Congress could hold a legislative session in November to pass measures.

Markets are also hoping for matching action in Europe. In Britain, the Treasury has signalled that it plans to bring forward spending planned for future years to help to buoy growth.

Optimism that money-market stress may be easing also grew. The three-month Libor rate for interbank borrowing in dollars fell by more than a third of a percentage point, in its sharpest one-day drop for nine months, to 4.05875 per cent.

The sign of revived willingness among banks to lend to each other came as Henry Paulson, the US Treasury Secretary, moved to fortify confidence in Washington's plans to inject fresh capital into American banks.

He insisted that banks that apply to sell stakes in themselves to the US Government would be expected to use the extra capital to boost their lending. He said: “Our purpose is to increase confidence in out banks, and increase the confidence of our banks, so that they will deploy, not hoard, their capital. And we expect them to do so, as increased confidence will lead to increased lending.” Mr Paulson also sought to placate taxpayers who believe that they are bailing out Wall Street for reckless behaviour. “There is no reason to expect this programme will cost taxpayers anything,” he said. “They will not only own shares that should be paid back with a reasonable return, but also will receive warrants for common shares in participating institutions.”

Mr Paulson, who announced last week that he would inject $125billion into nine leading US banks, said that he had received expressions of interest from a broad range of other banks seeking to secure a portion of the remaining $125 billion available.

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