Share prices across the West plunged again today on worries that European countries were in no hurry to cut interest rates and that yesterday's dramatic rate cut in America would not be enough to avert a US recession.

It looked as though the Dow Jones would follow suit as within seconds of opening, Wall Street slumped, with the benchmark Dow Jones industrial average sliding by 224 points to 11,746.

However, in a dramatic recovery the Dow Jones closed up 298.98 points at 12270.17 amid talk of a government-brokered rescue plan for credit insurers.

The New York state insurance regulator met on Wednesday with banks to discuss the potential of capital injections of up to $15 billion. The move would prop up credit insurers, which guarantee billions of dollars in bond payments.

Earlier, the FTSE 100 index of British blue-chip shares slumped by as many as 222 points to 5,518, testing a new two-year low and more than wiping out yesterday's gains. It closed down 130.8 points to 5,609.3.

Across Europe, stocks ended at their lowest close in 18 months, with the German Dax plummeting by 4.9 per cent and the French CAC 40 by 4.3 per cent in response to hawkish comments from Jean-Claude Trichet, the President of the European Central Bank.

Speaking to the European Parliament, Mr Trichet suggested that he was sticking with his anti-inflation stance and would not follow the US in cutting rates.

He said that it was his duty to “solidly anchor inflation expectations to avoid additional volatility”.

The fresh sell-off triggered predictions that a second radical cut in US interest rates could come as early as next week.

Capital Economics, the consultancy, forecast that the US Federal Reserve would cut its main base rate by another half-percentage point, from 3.5 per cent to 3 per cent, on top of the three-quarters of a percent reduction yesterday unless markets rallied spectacularly in the next few days.

Paul Ashworth, of Capital Economics, said the money markets were already suggesting there was an 80 per cent chance of a half-point cut when the Fed's rate-setters are next scheduled to meet next week.

He said: "Under those circumstances, cutting rates by only a quarter-point or, worse still, not at all, would risk undoing all the improvement stemming from this week's emergency cut."

Historically, the Fed had normally followed up an intermeeting cut with a further reduction at the next scheduled meeting, Mr Ashworth said.

The gloom over the economic slowdown continued to drive down energy prices today. Light, sweet crude for March delivery lost 84 cents to $88.37 a barrel on the New York Mercantile Exchange.

Investors hoping for fresh hints of an imminent cut in UK interest rates found little encouragement in the latest minutes of the rate-setting panel of the Bank of England, published today.

The Monetary Policy Committee, which voted 8-1 this month to leave rates unchanged at 5.5 per cent, was still concerned by renewed inflationary pressures.

However, the meeting was held before the latest turmoil in world markets.

Mervyn King, the Bank Governor, said last night that he was "hamstrung" because soaring food and energy prices were exerting inflationary pressures.

However, most analysts still expect a cut after the February 7 meeting.

Overnight, Asian markets put in stronger performances, with the Nikkei index in Japan rising by 2 per cent.

Hong Kong posted its biggest one-day gain in a decade, a 10.7 per cent leap, reversing Tuesday's 8.7 per cent plunge, as the Hong Kong Monetary Authority cut its base rate by 0.75 percentage points to 5 per cent in response to the Fed.

Despite the pan-Asian stock rallies, there is a fear that economies there can no longer expect to survive a US downturn unharmed.

“Many investors still believe that the credit crisis is purely a 'US sub-prime problem',” Richard Bernstein, the chief Merrill Lynch investment strategist, wrote in a note to investors today. “Nothing could be farther from the truth.”

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