The London stock market rocketed almost 10 per cent today — its biggest one-day percentage gain to date — after it emerged that Washington is trying to race through a new $500 billion fiscal stimulus package to kick start the world's biggest economy.

Shares in New York also soared after the US Government dug deep into its cash reserves to bail out Citigroup, once the world's largest bank.

In London, the FTSE 100 shot up by 372 points, or almost 10 per cent, to 4152.96. In New York, the Dow Jones industrial average rose 278 points to 8,324. The cheer spread across European stock markets with the CAC 40 in Paris and the Dax in Frankfurt both up 9 per cent.

Equity traders celebrated after it emerged that President Bush and Barack Obama, the US President-elect, are seeking to force through a new $500 billion fiscal stimulus package to try to avert what Wall Street believes will be a very deep recession for America. The package would be three times bigger than President Bush's tax rebate programme in May and far bigger than measures proposed by Mr Obama during his election campaign.

Washington has become increasingly concerned about the speed at which the US economy is deteriorating and the number of Americans who are losing their jobs. Currently, about 6.5 per cent of the American workforce is out of a job. Yesterday, in an interview with The Times, Professor Ken Rogoff, former chief economist at the IMF, said that America would be lucky if the unemployment rate peaked at 9 per cent.

Traders were also relieved after it emerged that Henry Paulson, the US Treasury Secretary, is minded to spend the remaining $400 billion of his bailout fund, which he had originally earmarked for his successor Tim Geithner. Mr Paulson, who has less than two months left in office, is trying to devise another package that would make it easier for American households to borrow money.

Late last night, the US Treasury, the American Federal Reserve and the Federal Deposit Insurance Corp announced that the Government had invested $20 billion in Citigroup and had agreed to guarantee $306 billion worth of risky assets.

Citigroup shares have collapsed over the past fortnight as Wall Street began to panic that the bank had insufficient capital on its books to withstand the extreme strain across the financial markets. Citigroup shares jumped 57 per cent to $5.91.

Traders were so relieved by the Citigroup bailout and the promise of a new economic stimulus package that they brushed off warnings by Alistair Darling, the Chancellor of the Exchequer, that the UK economy might shrink by as much as 1.25 per cent in 2009. Such a contraction would represent the biggest economic slowdown in the UK for 17 years.

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