Shares in New York soared in early trading today as China's four trillion yuan (£375 billion) economic stimulus plan and the promise of extended rescue packages in the US lifted markets despite company collapses and rising corporate losses. But the market's early gains were reversed as investors remained cautious about the domestic outlook.

The Dow Jones industrial average closed down 0.82 per cent or 73.27 points at 8,870.54 after opening over 200 points higher, following strong sessions in London and overnight across Asia.

In addition to the announcement of China's surprise plan to pump £375 billion into the world's fastest growing economy, there are hopes that fiscal packages designed to boost the US economy could be extended.

A plan, which could total as much as $300 billion, is expected and it is also thought that the existing $700 billion government bailout, announced in September, might be extended to enable America's struggling car manufacturers to draw on the support.

Barack Obama, America's president-elect, is known to have been supporting such a move.

A new package could include plans to increase unemployment benefits while the US food stamp programme, championed by Nancy Pelosi, the Speaker of the House of Representatives, might be extended.

Food stamps, which date back to 1943, are part of a federal programme that gives very low-income families an allowance to spend on groceries.

The rally on Wall Street was short lived as company results spooked investors.

Circuit City, America’s second-biggest electrical retailer, announced today that it had been forced to file for Chapter 11 bankruptcy protection. It is the first major US retailer to do so.

Fannie Mae, the US mortgage giant which was rescued along with Freddie Mac in September, posted a third-quarter loss of $29 billion.

Google slumped $12.36 to $318.78, its lowest price since October 2005 after Barclays analysts cut fourth-quarter revenue estimates for the company, saying the search-engine business has deteriorated.

And shares in General Motors dropped by more than 20 per cent, after analysts at Deutsche Bank said that the carmaker might not be able to fund its operations past December. On Friday, GM reported a massive loss.

In addition, the US Government today moved to rescue of the insurance company AIG for a second time, taking a $40 billion stake in the company as it unveiled third-quarter of $24.5 billion.

Earlier today, China's plan sent mining stocks soaring in London by over 130 points, though it calmed to a 78.2 point increase by mid-afternoon.

There are expectations that construction machinery specialists and commodity stocks will benefit from China's stimulus plan which it is hoped will be directed at public projects and other job-intensive infrastructure schemes.

In Japan, Tokyo's Nikkei 225 index climbed by 5.8 per cent, led by construction specialists despite new data that revealed that orders for machinery had fallen between July to September at rates not seen in a decade.

Over the weekend, China's State Council unveiled an enormous package of spending, amid signs of a dramatic slowdown in the past few weeks. The prospect of Chinese government-led demand for metals and other raw materials for construction offered a much-needed fillip to commodity prices.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive