Hopes of a bailout for America’s bond insurers triggered a blistering rally on Wall Street yesterday after regulators said that they were in discussions with investment banks about how to stop the fixed-income underwriting business from imploding.

A New York state department spokesman said that Wall Street banks were in talks with Eric Dinallo, New York’s Insurance Superintendant, about raising capital to shore up the bond insurers. The Dow Jones industrial average climbed almost 3 per cent, or 299 points, on the news, having been down 326 points at one point.

There were fears that one of the bond insurers would default on its obligations and trigger even bigger losses for investment banks that hold the defunct debt. Shares in two of America’s biggest bond insurers, Ambac Financial and MBIA, jumped 72 per cent and 33 per cent respectively.

It was hoped that new capital would protect the credit rating of some insurers that is required for them to underwrite most bonds. Between them the insurers underwrite $2.4 trillion-worth (£1.2 trillion) of assets.

The bailout talks came as Warren Buffet, the billionaire investor, took a 3 per cent stake in reinsurer Swiss Re.

The mood in London, however, was far more subdued. In the City, the FTSE 100 lost more than 2 per cent of its value on fears that an imminent recession in the US would spread across the Atlantic.

Citigroup added to the gloom as it shed hundreds of its London staff.

The Centre for Economics and Business Research (CEBR), an independent think-tank, said that it expected about 8,000 City job losses this year, a 20 per cent increase on its last forecast, in October.

The FTSE 100 fell 130.8 to 5,609.3, all but wiping out gains made immediately after the 75 basis point cut to US interest rates on Tuesday.

George Soros, the billionaire fund manager who predicted sterling’s devaluation in 1992, said that negative economic growth was unavoidable in the US and the UK. His comments were supported by Sir Howard Davies, the director of the London School of Economics and former Deputy Governor of the Bank of England. Sir Howard said: “The chances of avoiding recession here are pretty slight.”

Citigroup began its 4,200 global redundancy programme on the same day that some of its 11,000 Canary Wharf-based staff were informed of their latest annual bonuses, awards that have been blunted by the group’s sub-prime-related losses.

Fixed-income traders at the world’s largest bank will bear the brunt of the 150 job cuts expected from the London investment banking team, sources said. Cuts were also due in equity research, wealth management and consumer banking, taking its UK cull to between 300 and said.

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