There is no “quick solution” to present worldwide market upheavals, which will take time to be resolved, Henry Paulson, the US Treasury Secretary, told investors yesterday as fears of a deepening global credit squeeze saw more gyrations for shares and bonds.

Mr Paulson’s stark assessment came as he convened closed-door talks in Washington to discuss the market turmoil with Ben Bernanke, the US Federal Reserve Chairman, and Christopher Dodd, chairman of the Senate Banking Committee.

Despite warning investors that there was no easy fix for markets, the Treasury Secretary also urged calm. “Credit is being repriced, reassessed across our capital markets,” he said. “This will play out over time, and liquidity will return to normal when the market has a better understanding of the risk-return trade-off.

“Markets straighten themselves out over time. This is going to take a while to play out.” Mr Paulson argued that action by the Fed, which last week cut the rate it charges US banks for short-term lending, “makes it easier for the markets to focus on risk”.

The Fed and other central banks were active again trying to stabilise lending markets, as more volatility in the traditional safe haven of government bonds highlighted the persistent stress on credit conditions.

In London, yields on benchmark 10-year gilt fell to a five-month low of 4.96 per cent as an investors’ scramble for greater security drove up prices.

In a further sign of credit market strains, the gap between the pricing of the highest and lowest risk commercial paper hit its widest since 2001.

Yields on three-month US Treasury bills initially fell a further 0.35 per cent, to 2.86 per cent, after plunging on Monday in the biggest one-day fall since the 1987 stock market crash.

Yields then staged a dramatic about-turn, however, climbing above 4.2 per cent, as remarks by Senator Dodd boosted hopes that the Fed would soon cut US interest rates, before falling back once more towards 3.5 per cent. The influential senator said that he had urged Mr Bernanke to use “all the tools available” to quell market disruption and that the Fed Chairman had indicated that he was “absolutely” ready to do this. In the wake of these remarks, two-year US Treasury notes also rebounded sharply to levels above 4 per cent, having earlier hit near-two-year lows.

The Fed injected $3.5 billion more into markets yesterday, while also infusing liquidity by cutting fees for lending securities to dealers. Shares in London and New York struggled for direction as hopes of a Fed rate cut were offset by unease over credit markets.

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