The Government’s unprecedented move to guarantee Northern Rock deposits appeared to be succeeding yesterday in stemming the run on the bank and restoring calm to the financial markets.

Queues disappeared from most branches and Northern Rock shares were marked 8 per cent higher on hopes that the explicit government guarantee would pave the way for a rescue bid.

Concern that the panic could spread to other financial institutions also receded as their share prices bounced back. Alliance & Leicester shares rose more than 32 per cent, while Bradford & Bingley went up 6 per cent.

Northern Rock said that only four of its seventy-six branches were dealing with queues, and the volume of phone calls was down by nine tenths. Moreover, eight out of every ten calls were from depositors wanting to reinvest in the bank, reassured by its pledge to repay penalty charges.

The abrupt change of public mood from fear to opportunism was illustrated by one private client stockbroker, Hoodless Brennan, which reported a surge of business from people wanting to open share trading accounts to buy Northern Rock shares.

However, a few continued to queue to withdraw their savings. One, a retired company director aged 59, said outside a branch in North London: “The fact that the Government has stepped in doesn’t make me feel any more confident. I’m putting my savings in a building society - I trust them more than the banks.”

Share prices across the market bounced, retracing almost all of Monday’s losses. The FTSE 100 index of blue-chip companies ended the day 100.5 points higher at 6283.3. But traders said that the wider credit crunch was far from over and the Bank of England pumped £4.4 billion into the short-term money markets yesterday in an attempt to bring more stability.

Although MPs and bankers voiced concern about the handling of the crisis by the Bank of England and the Financial Services Authority (FSA), there was widespread relief that, for the present, stability had been restored. John McFall, chairman of the Treasury Select Committee, welcomed the policy shift. “I think it was welcome in not just focusing on Northern Rock, but establishing confidence in the entire financial services industry. The panic risked undermining that.”

However, he added that he would be cross-examining Mervyn King, the Bank Governor, on the apparent policy change when he appeared before the committee tomorrow. “One of the questions is whether the approach has been consistent.” Richard Lambert, the Director-General of the Confederation of British Industry, approved the policy shift. “For now, in the eye of the storm, this was a bold and appropriate move,” he said. If it restored confidence, “then it will have been a move well worth making”.

Angela Knight, chief executive of the British Bankers’ Association, said: “It was a confidence issue and confidence is being restored. Stocks are going up and queues are going down.” But she criticised the Bank of England and the FSA for failing to get the right message across on Friday and over the weekend, when people perceived that “there was a real problem”.

Colin Breed, Liberal Democrat MP for South East Cornwall and another select committee member, said that the committee would investigate the behaviour of the City watchdog, the Bank of England and the Treasury. “

When the dust settles there needs to be a serious inquiry, looking at whether the FSA needs to strengthen its rules on monitoring the activities of the banks. There also needs to be a clear understanding of the precedent created by the Treasury, which leaves them a hostage to the future, and we need to hear from the Bank of England.” he said.

Mr Breed said that the guarantee had effectively made putting cash in Northern Rock savings accounts more attractive than investing in government bonds. “Why would anyone buy gilts when you can put your money into Northern Rock, get good interest rates, and still enjoy a government guarantee?” he said.

Guidance from Treasury officials that the same guarantee would apply to any other retail institution in the same position as Northern Rock means that taxpayers are, in theory, underwriting £1,600 billion of UK deposits - more than Britain’s entire annual national output.

Gordon Brown emphasised his confidence in Mr King after criticism that the response to problems had been too slow. Mr King’s first five-year term ends within months and comes up for review in November. Asked whether Mr Brown retained full confidence in Mr King, a spokesman said that he did.

Mr King, the FSA and the Treasury engaged in talks about ways of improving the Government’s bank deposit protection scheme. Legislation is expected to be drawn up to remove limits, which provide 100 per cent guarantee on the first £2,000 of savings and 90 per cent on the next £33,000.

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