Britain’s battered stock market investors won a respite yesterday from the past month’s brutal slump in shares after a surprise move by America’s powerful central bank to calm markets sent the value of the country’s leading bluechip companies soaring upwards.

In a dramatic revival from Thursday’s painful losses, which were larger in points terms even than those suffered on Black Monday in 1987, the FTSE 100 index yesterday rebounded by 205 points, registering its biggest percentage gain in 4½<NO>down by more than 8 per cent since the end of June, and by 2.5 per cent since the start of the year.

The London stock market’s resurgence, which was mirrored on Wall Street in New York, and on bourses across Europe, came after the Fed announced that it was cutting a key lending rate for short-term borrowing between America’s commerical banks.

The Fed said that it acting to “promote the restoration of orderly conditions in financial markets”. In a further fillip for the shredded nerves of retail and institutional investors, the central bank also signalled that it was ready to cut its Fed Funds rate — mainstream US borrowing costs that are the equivalent of Bank of England base rates — if its moves yesterday failed to quell the turmoil in markets.

Economists and other financial experts were sharply divided over whether yesterday’s unexpected action would be enough to stem the turbulence. Markets have been shaken badly by fears over multibillion-dollar losses sparked by a wave of defaults on mortgages given to financially over-stretched Americans in the so-called “sub-prime” home loans.

The fallout has left commercial lending activity around the world at risk of seizing up. In turn, that has triggered the vicious sell-offs in shares seen in recent weeks as some institutions have struggled to meet financial commitments and have been forced to sell in a “dash for cash”.

As US shares also leapt upwards yesterday, Julian Jessop, of Capital Economics in London, said that the worst of market upheavals may be over. “Even before Friday’s move, there were several good reaons to think that the storm will pass soon,” he said.

Other observers were much more gloomy. “There’s still just as much of a risk that the \ market could be down another 5 to 10 per cent three months from now,” Michael James, a senior trader at Wedbush Morgan, a Los Angeles investment bank, argued. “I don’t think anyone knows with certainty that things won’t get worse than they are right now.”

Martin Slaney, of GFT Global Markets in London, cautioned that the Fed’s move might not have a long-lasting effect. “This may prove to be a knee-jerk rally,” he said. As speculation grew that the Fed move suggested that it feared the collapse of a big institution, Mr Slaney argued that “there is a sense of panic coming from the Fed”.

The Bank of England is not expected to make any move to follow in its US counterpart’s footsteps and ease financing costs for British institutions and companies. But persistent market disruptions will encourage hopes that borrowing costs in Britain have reached a peak. Expectations of a further rise in base rates have faded after a surprise slide in inflation in July figures and news that most members of the Bank’s rate-setting committee have “no firm view” over whether another rate rise will be required.

Alistair Darling, the Chancellor, who is set to deliver his first Pre-Budget Report and set out three year spending plans in just two months, sought to reassure investors. “The UK economy is strong and stable,” he said. “The global economy is also strong.”

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