The FTSE 100 enjoyed its biggest one-day gain yesterday as markets toasted the weekend bailout of Citigroup, the American banking giant.

The index of Britain’s leading companies surged 372 points to 4,152.96, a gain of 9.8 per cent, with markets taking heart from Alistair Darling’s plans to revive the economy. They were also propelled by mounting expectations that the United States is preparing to announce a $500 billion (£330 billion) economic stimulus package and that the US Treasury is thinking of accelerating distribution of $350 billion from its bank bailout fund.

Continental stock markets also made substantial gains, with the German Dax index climbing more than 10 per cent and the French CAC 40 closing ahead by 9.4 per cent. US stocks posted the biggest two-day rally since 1987. The Dow Jones industrial average closed up 396.97 points, nearly 5 per cent, at 8,443.39, and the S&P 500 added 51.75 points, or 6.5 per cent, to end the session at 851.80.

As crude oil prices rose above $51 a barrel before expected production cuts from Opec this weekend, BP and Royal Dutch Shell accounted for much of the advance of the FTSE 100.

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The FTSE, which had declined by 11.5 per cent last week to finish at its lowest level in five and a half years, was also boosted by banking stocks. Shares in Barclays improved by almost 10 per cent as shareholders approved its controversial £7 billion fundraising and HBOS finished almost 18 per cent higher.

Retail stocks were buoyed by the Chancellor’s confirmation of plans to cut the rate of VAT from 17.5 per cent to 15 per cent for 13 months from Monday. Shares of Next rose by 10 per cent and Kingfisher – the owner of B&Q – J Sainsbury and Marks & Spencer improved by 9 per cent, 8 per cent and 7 per cent respectively.

However, traders gave warning that the rally was potentially short term and could not be trusted. David Buik, of BGC Partners, the brokerage, said: “Don’t kid yourself that this rally was anything to do with Mr Brown. It was down to a ‘dead-cat bounce’ and an 800-point rally over two days of the Dow and a solution to the parlous state of Citigroup.” Joshua Raymond, a City Index market strategist, said: “This is a huge move and is a clear short-term relief rally. It’s pure emotion and sentiment.”

Tim Hughes, the head of sales trading for IG Index, said: “Thoughts are instantly turning to the future and how these cuts are going to be paid for, with the potential prospect of steep tax increases in the long term. Similarly, the steps taken to protect Citigroup in the US have many investors wondering just where the bailouts will end – and what form the inevitable payback will take.”

In the bond markets, two-year gilts fell as Mr Darling stunned investors with news of bigger-than-expected government borrowing. Yields added seven basis points to 2.04 per cent, and the yield on ten-year gilts rose by seven basis points to 3.92 per cent.

Significantly, amid concerns over the extent of government borrowing, credit default swaps for UK gilts – effectively insurance taken out by investors to protect against the Treasury defaulting – reached a record high. Sterling rallied against the US dollar, rising from $1.5086 to $1.5120 during the Chancellor’s speech.

Catherine MacLeod, a global economist for BDO Stoy Hayward Investment Management, said that the surge in Britain’s national debt should not affect the pound too adversely. “To the extent that every other major country is spending large amounts, the rise should not hurt the pound too much.”

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