London’s reputation as a leading financial centre suffered a serious blow yesterday when the Stock Exchange was knocked out by a computer systems failure on what promised to be one of the most profitable days of the year.

The shutdown, which lasted seven hours, is estimated to have cost traders millions of pounds on a day when shares surged around the world in response to the rescue of America’s biggest mortgage firms.

Angry City dealers watched from the sidelines as competitors in other financial centres, from Toyko to Frankfurt, enjoyed an unexpected windfall during a frantic day of trading. The misery was compounded when the Intercontinental Exchange, the market where oil futures are traded, also saw an interruption of trading for more than an hour after an unrelated systems failure.

“It’s awful. On a day when the eyes of the world are watching all the financial markets, for us not to be able to trade it’s appalling,” said one dealer.

The systems failure occurred on the day that Dame Clara Furse, chief executive of the London Stock Exchange, wrote to the Financial Times praising the Exchange’s adept use of the latest technology.

London traders were braced for a frenetic start after Sunday’s decision by US authorities to provide billions of dollars to rescue the mortgage companies known as Freddie Mac and Fannie Mae. In the first hour of trading, shares surged, lifting the FTSE 100 of the biggest companies by almost 200 points. More than 270 million shares were traded in the first hour, compared with 617 million for the whole of the previous Monday.

Stock Exchange officials suspended trading when it became apparent that many brokers had lost their connection to the system. Trading was not resumed until 4pm, 30 minutes before the day’s official close. David Buik, of the BGC Partners brokerage, called the stoppage a shambles and asked why the world’s third-largest exchange in terms of share volumes traded did not appear to have successful back-up systems. “I cannot understand why the LSE system is not run in duplicate. So much and so many clients rely on its durability. They cannot afford to be let down,” he said.

Angus Rigby, chief executive of the online stockbroker TD Waterhouse, whose clients were unable to trade through the Exchange, said: “It’s disastrous timing for the LSE. Our customers are suffering today. Most brokers aren’t able to do anything.”

The breakdown comes as the London market is facing increasing competition. A virtual monopoly since it was created two centuries ago, the London Stock Exchange now has two other trading platforms operating here and another two set to start up over the next couple of months.

Some analysts have suggested that these new entrants, several owned by American companies, including the New York market Nasdaq that last year abandoned a hostile takeover bid for the LSE, could take half its market.

A LSE spokeswoman said it was “premature” to discuss what had caused yesterday’s market failure, the worst for eight years in London. A spokesman said: “We will be doing everything to ensure there is no recurrence of this event. This is a black swan event [something, in market parlance, that could never be foreseen].”

Although the Exchange was sparing with the detail, traders said the system did not seem to have ground to a halt because it was overwhelmed. It appears to have been a glitch in the communications system that keeps market players in touch with the electronic trading platform on which business is transacted.

The FTSE 100 closed up 205.6 points at 5,446.3, its biggest one-day rise since January 24.

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