President Bush is today expected to unveil firm plans to use $250 billion worth of US taxpayer funds to seize stakes in nine of America’s biggest banks as part of a move to stabilize the US banking system.

The proposal to use part of Washington’s $700 billion rescue fund to buy bank stock is expected to be announced by the White House today. The plans follow emergency talks in Washington convened yesterday between Henry Paulson, US Treasury Secretary, and America’s most important bankers including Lloyd Blankfein, the chief executive of Goldman Sachs, and John Mack, the chief executive of Morgan Stanley.

The measures being drawn up by Washington represent just part of yesterday’s unprecedented multi-trillion-dollar bailout by governments and central bankers across the world to safeguard lenders, guarantee deposits and inject cheap liquidity into the global financial system to prevent a meltdown of the worldwide banking system.

It is not clear how much of federal money would be invested in each institution, but it is thought that the system has been designed to remove any stigma from receiving Washington funds – a stigma that could prompt unwarranted speculation that a bank was in a more vulnerable state than is the case. It is also understood that not all of the nine banks are happy with selling a stake at a discounted price but have grudgingly agreed.

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At the same time, the FDIC, the federal bank insurer, is expected to announce measures that will extend its guarantee of retail deposits to some types of low risk bank debt for a period of three years.

Such a bailout follows the lead of Gordon Brown who last weekend unveiled plans to take majority stakes in Royal Bank of Scotland and HBOS, and to inject £37 billion of capital into Lloyds TSB.

The move by the US Treasury throws light on last-minute negotiations to secure Japanese funding to protect the future of Morgan Stanley. It is understood that Mitsubishi, the Tokyo-based bank, was able to agree to a $9 billion investment because of guarantees offered by Washington.

It is understood that Ken Lewis, the chief executive of Bank of America, the financial institution that has bought Merrill Lynch; Jamie Dimon, chief executive of JPMorgan Chase; Vikram Pandit, chief executive of Citigroup; and Robert Kelly, chief executive of Bank of New York Mellon, were also ordered to attend Mr Paulson’s summit meeting.

The plan marks a quick about-face for Washington policymakers, who until recent days had been focusing on building an apparatus to soak up bad assets from banks.

News of the US bank bailout emerged after Wall Street has closed, However, the deal came after an astonishing day across world stock markets, which had rejoiced at an unprecented global bailout. Shares across the world soared in their biggest one-day advance since the rebound after the Black Monday crash of October 1987 as traders awoke to an astonishing coordinated assault by governments to crack frozen credit markets and initiate bank rescues designed to prevent the collapse of the international financial system.

In New York, the Dow Jones industrial average, which had lost a fifth of its value last week, closed 936.42 points up – its biggest single-session points rise in history – at 9,387.61, a rise of 11 per cent. In London, the FTSE 100 rocketed by 324.84 points, 8 per cent, to 4,256.90.

European markets surged, led by the CAC 40 in Paris and the Dax 30 in Frankfurt. The groundswell of optimism had started overnight in the Far East, where the Hang Seng index in Hong Kong shot up by 10 per cent.

A few hours later, France, Germany, Spain, the Netherlands and Austria committed $1.8 trillion (£1,000 billion) to guarantee bank loans and take stakes in lenders to try to halt the meltdown of the financial infrastructure.

The US Federal Reserve, the European Central Bank, the Bank of England and the Swiss National Bank also said that they would lend commercial banks unlimited dollar liquidity funds to ease clogged interbank lending rates.

Paul Krugman, of Princeton University, who won the Nobel Prize for Economics yesterday, said: “I’m slightly less terrified today than I was on Friday. We’re going to have a recession, and perhaps a prolonged one, but perhaps not a collapse.” Earlier in the day, the first details of Washington’s $700 billion bailout of Wall Street began to emerge.

Traders were relieved after Neel Kashkari, the newly appointed head of the fund, said that the Treasury was accelerating its plans to start buying up toxic mortgage-backed assets from banks and had also appointed law firms to find an asset manager and, critically, to take advice on how to buy up stakes in banks.

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