Shares in London and New York soared today after the US Federal Reserve cut its discount rate to ease fears of a global credit crunch.

The Fed said that the downside risks to growth posed by deteriorating financial conditions had increased appreciably and that it was prepared to act as needed to protect the US economy, the world's largest.

In London, the FTSE 100, which tracks the UK's 100 largest public companies, closed sharply higher, up 205.3 points at 6,064.2, but off a peak of 6,134.00.

The FTSE 250 midcap index, widely regarded as a better indicator of the health of corporate Britain, ended the day 223.6 points higher, at 10,686.2.

BACKGROUND

• Elephant slumps in wake of crunch

• Heads on the block, investors call for change

• Credit crunch forces Delek to leave property deal

• US rate cut looks certain after new data

• Bank of America to axe 3,000 after 'our errors'

BACKGROUND

• More pain for private equity industry

• Russian state bank poised to boost liquidity

• House prices‘to stay flat for years’

• Will soaring oil pump up inflation?

• US bank slump goes on

Black clouds loom on horizon

For the first time in 15 years, I am seriously worried about the outlook for the economy, the housing market and sterling

Float on the job market

Don't believe the scary headlines. It's not the worst time to consider a career in banking

Related Links

• Stock market rout as blue chips lose £60bn

• Yen carry trade faces implosion

• Top trader marks day of the 'great unwind’

In New York, at the London close, the Dow Jones was up more than 133 points to 12,980 after six straight days of losses. It had earlier broken through the 13,000 barrier.

The technology company-heavy Nasdaq was up 32 points at 2,483, and the S&P gained 15 points to 1,426.

Martin Slaney, head of the spread-betting firm GFT Global Markets, said: "The markets have taken this move as a positive step, but this may prove to be a knee-jerk rally.

"This looks like a U-turn from the Federal Reserve, which only a few days ago suggested it was not too concerned about the credit squeeze.

"The market turbulence has forced the Fed’s hand here, and whilst an emergency cut might give the markets some temporary relief, some might say there is a sense of panic coming from the Fed.

"An emergency cut such as this may have worked to calm markets in previous times of turmoil, such as after 9/11, but this time it could prove counter-productive."

Markets in Asia, which closed before the Fed move, had suffered earlier in the day. The Nikkei 225 index in Tokyo crashed 5.4 per cent to end at 15,273.68, its lowest close in a year.

Last night the FTSE 100 closed off 250.4 points, or 4.5 per cent, at 5,858.9, wiping £60 billion from the value of the UK's leading companies in frenzied trading and amid mounting fears of a global credit crunch.

It was the biggest one-day fall in four and a half years.

In points terms, the drop in the FTSE 100 index was its fourth-biggest ever, eclipsing even that suffered on Black Monday in 1987.

The index was pushed back below the watershed of 6,000 as its latest day of bloody trading conditions saw it finish the day at 5,858.9, its lowest close since last September.

Alistair Darling, the Chancellor, sought to give further reassurance this morning that the UK economy was strong enough to cope with the stock market turmoil.

"Fundamentally, we have got a strong economy and we need to keep that very much in the front of our minds," he told the BBC, adding that in the UK, "no institution has gone to the Bank of England and said that they need funds".

Tokyo stocks had their worst session since the April 2000 explosion of the dot-com bubble this morning, as Japan’s biggest exporters saw their shares savaged today in a panic over the implosion of the yen carry trade.

Japanese shares bled 5.4 per cent of their value in only a few hours of trading, marking the Nikkei's worst one-day performance in seven years.

Brokers said that their hedge-fund clients now found themselves in a “perfect storm” of asset destruction, with both equity and currency markets turned against them and nowhere credible to flee for safety.

“With the global extent of both the yen carry trade and sub-prime risk both vast, totally unknowable unknowns,” said one Nomura broker, “the market has realised that it no longer has a proper mechanism to price stocks and risk.

“When you lose the ability to price assets, you have only two options — sell or do nothing. Hedge funds have to sell and, though some big funds may be able to sit on their hands a bit longer, if they turn forced sellers, we are in total meltdown.”

Added to the confusion on Tokyo was the Bank of Japan’s gambit of pumping 2 trillion yen (£9.1 billion ) of liquidity into the financial system as part of what appear to be increasingly desperate efforts to mitigate the effects of a global credit crunch.

The BoJ, in common with some other regional central banks, has switched strategies repeatedly over the past eight days, draining and then flooding the market with cash.

The combination of the unwinding carry trade and across-the-board stock plunges has made some investors forced sellers of shares and forced buyers of the yen borrowed to finance the stock purchases in the first place.

In Hong Kong, the benchmark Hang Seng index lost as much as 6 per cent of its value before closing down 703.3 points, or 3.3 per cent, at 20,672.4.

In Tokyo trading, the dollar tumbled to Y112 as the carry trade continued to collapse, destroying the profit models of many Japanese companies, such asToyota, Canon and Sony, which derive large portions of their earnings from the US market.

Eyeing the huge volumes of trade in Friday’s market melee, dealers also blamed the Nikkei 225’s stunning 874-point crash on the lack of any force that might immediately apply the brakes to the market’s slide.

Although analysts point out the many “bargain basement” prices that now hang over a large number of blue-chip Japanese and Asian stocks, nobody has the funds to pick them up because money markets are in dysfunction and portfolios are nursing losses on all their components.

Although the previous week had seen forced unwinding of technically sophisticated hedge-fund positions, Friday’s market, said dealers, turned into a free-for-all rout from which there appears no “silver bullet”.

Dealers at Mizuho Securities said: “Several hedge funds have called in the course of today to say that they have unwound their entire Japanese and Asian books, preferring to hold cash and wait out the madness.

"Long-only funds, without that option, are engaged in an even nastier waiting game.”

The dollar/sterling exchange rate fell to $1.9727 in morning deals but was trading at $1.9773 at midday.

The Australian dollar notched up its biggest one-day fall against the US dollar since 1984, when it was allowed to float without intervention.

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