Shares slumped again on both sides of the Atlantic today after the European Central Bank was forced to inject a record 95 billion euros (£65 billion) into money markets as mounting global credit jitters sparked an abrupt scramble for cash by financial institutions.

The unprecedented emergency action by the Frankfurt-based ECB outstripped even the scale of its intervention on the day after the September 11, 2001, terrorist strikes on the US, when it pumped in 69 billion euros of liquidity to stabilise credit markets.

The move badly unnerved already rattled investors and sent shares tumbling in London and New York as it fuelled anxieties over the global credit squeeze. Amid record trading volumes in the City, the FTSE 100 index lost 122.7 points, or 1.9 per cent.

In New York, the Dow Jones industrial average plummeted by 387.2 points, or 2.8 per cent, closing at 13,270.7, in its worst losses since a 416-point plunge in February, when investors were shaken by a drastic sell-off in China’s stock markets.

Earlier, the ECB was forced to wade into Europe’s overnight loan markets after a sudden "dash for cash" by commercial banks threatened to trigger a seizing-up of the Continent’s financial system.

Before the ECB moved in, the interest rate for eurozone banks seeking to borrow money from each other overnight spiked upwards, reaching 4.62 per cent — its highest since the aftermath of the 9/11 attacks and far above the central bank’s 4 per cent target level.

The surge in overnight rates was the latest sign of the strains on financial institutions from the worsening world squeeze on credit. It came as leading banks struggled to secure finance to cover more than $300 billion (£148 billion) of corporate loans stockpiled on their balance sheets, and resorted to tapping the overnight money markets for funds.

"There appears to be a dash for cash both in dollars and in euros," Nick Parsons, head of strategy at nabCapital, said. "Because liquidity in the market is drying up, and because financing is also becoming difficult, it seems that investors who need to finance holdings of securities are not being able to draw on credit facilities and instead are having to finance off the cash market. That’s putting up rates for cash."

Those pressures were also evident in London money markets as overnight dollar lending rates leapt to 5.45 per cent, also a six-year high, having begun rising late on Wednesday in New York trading.

Stresses in the overnight market, and fears over the toll from the credit squeeze, were further amplified by an announcement by BNP Paribas, the French bank, that it was freezing E1.6 billion of funds. BNP spooked markets with a statement blaming the "complete evaporation" of liquidity.

As the ECB stepped in to quell today’s disruptions, it said that it "aimed to assure orderly conditions in the euro money market". It made clear that it was ready to provide unlimited funds at 4 per cent and ended up providing some 94.8 billion euros.

Other central banks were also spuured into action, with the US Federal Reserve providing $24 billion as part of daily money market operations, against only $5 billion provided on Thursday last week. The Bank of Canada also said that it was ready to provide funds to markets and was working "in concert" with other central banks. The Bank of England refused to comment.

As shares tumbled as equity markets were shaken by the news, President Bush stepped in with a bid to calm frayed nerves. "The fundamentals of our economy are strong. I’m told there is enough liquidity in the system to enable markets to correct," he said. David Bianco, chief equity strategist at UBS said that there was "excessive fear" priced into stock markets.

Despite that attempt to soothe investors, shares were battered in bloody trading sessions in London and New York. On Wall Street, as implausible rumours of an emergency Fed interest rate cut swirled, shares in investment banks were hardest hit, with Goldman Sachs down 5 per cent amid mounting speculation over steep losses in its Global Alpha hedge fund.

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