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Washington today announced a $50 billion plan to guarantee America's money-market funds in a move designed to restore confidence to the battered banking system.

The arrangement, personally approved by President Bush, emerged before Henry Paulson, the US Treasury Secretary, is expected to unveil details of the biggest US Government bailout since the Great Depression.

Mr Paulson will announce the rescue at 10 am today in New York, when he is expected to unveil the creation of a federal-backed investment vehicle into which America's banks can dump toxic mortgage-backed securities.

The plan to guarantee money-market funds, which hold the pensions and savings of millions of Americans, emerged after the Securities and Exchange Commission (SEC), in conjunction with the UK's Financial Services Authority (FSA), banned the short-selling of stocks.

The SEC said today it will ban the short-selling on 799 financial stocks for 10 days but this could be extended for up to 30 days. In the UK, the FSA has prohibited short-selling, where traders make money by betting a share price will drop, for four months.

Today’s temporary deal to insure money-market funds - bankrolled by the Treasury's Exchange Stabilisation Fund - will inject confidence back into the stock market.

Money market funds are regarded as relatively safe since they invest in short-term securities that have a high credit-rating and are not allowed invest more than 5 per cent of the fund in any one financial institution.

The funds seek to maintain a stable $1 net asset value, however, this week that value dipped to 96 cents - a price movement known as breaking the buck.

Expectations of the US federal bailout, designed to stop this week's domino-style collapse of banks and insurers, today sent the FTSE 100 heading towards its largest ever one-day rise since 1987 after it surged by nearly 8 per cent to 5,267.8.

It is believed that US Government's plan, which would have to be passed by Congress, could be made law as early as Wednesday.

It is unclear how the assets would be valued, although there have been suggestions that the securities could be priced at an auction, underwritten by the Government, and eventually sold back to the market.

So far, the US Government has spent over $600 billion to support its creaking financial system.

Most recently, the US Fed agreed a $85 billion loan to AIG, the troubled US insurance giant, before which it pledged to prop up Fannie Mae and Freddie Mac, to the tune of $200 billion. Earlier this year, it helped the eleventh-hour rescue of Bear Stearns by JP Morgan Chase.

However, at the weekend, the Government refused to step in and rescue Lehman Brother which was forced to file for bankruptcy on Monday. Since then, Barclays, the UK bank, has agreed to acquire Lehman’s US operations for around $2 billion.

Banks have been unwilling to lend to each other over the last year and have been suspicious of each other's exposure to mortgage-backed assets.

It is hoped that if they are all able to rid themselves of their mortgage backed bonds, Wall Street - the world's most important capital market - will begin functioning normally.

Australia has also banned short-selling and it is believed that Europe is examining a crackdown of the practice.

While such trades are legal, they are exacerbating steep falls on the stock market, already nervous about which bank will be next to go bust.

Today's rise on the FTSE is ahead of a previous record 7.8 per cent rise on October 21, 1987 two days after “Black Monday”, when stock markets around the world crashed.

In Europe, France leading stocks soared by 6.5 per cent and in Germany, the DAX added 3.9 per cent.

Markets in Asia also soared after a week of steep falls. In Hong Kong, the Hang Seng rose nearly 10 per cent, in Shanghai leading stocks increased by 9.5 per cent, while shares in Japan and Korea also made strong gains.

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