US shares soared yesterday, staging their strongest rally for six years, as hopes grew that Washington is striving to assemble a comprehensive, state-backed solution to the financial crisis racking Wall Street.

Last night Henry Paulson, the US Treasury Secretary, met Ben Bernanke, the Federal Reserve Chairman, and other leading officials, fuelling expectations that Mr Paulson is working to devise a permanent fix to the crisis – and end the frenzy of piecemeal rescues – which sparked a ferocious late rally in New York.

After tumbling even as the US Federal Reserve led an unprecedented $180 billion (£99 billion) concerted effort by the world’s main central banks to quell market turmoil, the Dow Jones industrial average, the leading US index, leapt 410.00 points, or about 4 per cent, to 11,019.70. It was its strongest rally since 2002.

It is thought that the key ideas being considered by Mr Paulson, the White House and the US Treasury officials could draw on the model of the Resolution Trust Corporation created by the authorities to clean up the damage inflicted by America’s savings-and-loan crisis of the 1980s. A similar strategy could be adopted to ringfence the toxic bad loans held by many US institutions.

Earlier, the case for a more lasting solution was boosted after central banks united to pump billions into seized credit markets in a move that only partly tamed persistent financial convulsions.

Pressure for a lasting “system-wide” fix for the credit crisis was fuelled as Morgan Stanley, one of the last two remaining independent US investment banking titans, continued talks with would-be rescuers. Morgan Stanley was in negotiations with the state-owned China Investment Corporation (CIC) for fresh funds, and took discussions to merge with Wachovia, the US financial group, to a “more formal” level.

The talks were aimed at bolstering the investment bank’s weakening financial position, as new signs emerged that its vulnerable position was endangering its ability to keep trading. Morgan Stanley withdrew from the Platts oil trading window after questions were raised about its credit standing in the multibillion-dollar market for physical cargoes of crude oil. Throughout yesterday, key gauges of financial stress remained close to record levels despite the drive by the central banks, led by the Fed, to curb the turmoil and break the logjam in money markets.

The acute financial strains sparked another bout of severe volatility across the world’s markets as investors continued a scramble to dump risky assets and seek security in government bonds and gold, as well as short-term cash and bills.

As investors sought sanctuary from financial risk of all kinds, Wall Street’s so-called fear gauge, the Vix index, a measure of markets’ volatility, leapt to its highest level this year.

In London, the FTSE 100 index of leading shares extended a week of brutal losses to close down by a further 32.4 points, at 4,880.00. A FTSE rally above the watershed level of 5,000 proved short-lived even after the Bank of England joined the Fed, the European Central Bank, the Bank of Japan, and the Canadian central bank in yesterday’s united effort. European shares also closed down.

Respite from the market turbulence proved limited after the Fed used a massive $180 billion currency swap to make dollar funds available to the other leading central banks in Europe and Asia to lend on to their local commercial banks to assuage their hunger for dollar funds. At the same time, the Fed, the Bank of England and the ECB also injected further huge amounts of funding into short-term interbank loan markets.

In mixed results from the aggressive operations, British banks took up only $14 billion of the dollar funds auctioned by the Bank of England, a third of what was on offer. But UK groups grabbed sterling loans offered under the Bank’s regular auction, bidding more than £200 billion for £66 billion on offer. Across the Channel, 61 European banks bid more than $100 billion in an ECB auction of $40 billion. Demand was also strong in a separate auction of one-day euro funds.

The Fed directly injected a record $105 billion in overnight funding into the US banking system. The efforts helped to rein in the soaring cost to banks of borrowing overnight dollars from one another, with the rate for these funds fixed at 3.844 per cent, down from more than 5 per cent on Wednesday and levels above 10 per cent this week.

Yet, in a further symptom of unrelenting financial stress, the rate for three-month dollar funds jumped to the highest since January, at 3.20 per cent. At the same time, investors’ dash for short-term safety saw them continue to pile into ultra-safe, US Treasury bills, keeping the yield on these at lows not seen since the early 1940s. The yield fell to as low as 0.05 per cent – up a fraction from Wednesday, when it briefly slipped below zero.

Gold, the most traditional safe haven, also leapt again, adding to a record one-day rise on Wednesday to jump by another 7.7 per cent above $900 an ounce to close at $916.10. The US Treasury announced plans to raise an extra $100 billion in funds in new government debt to give the Fed extra firepower to fight the crisis.

As Morgan Stanley’s search for a buyer continued last night, it appeared that its talks to sell a further stake in itself to CIC, the Chinese sovereign fund, which injected $5.6 billion into the bank in December for a 9.9 per cent stake, would probably see CIC increasing its holding to slightly less than 50 per cent. After heavy early losses, Morgan Stanley shares ended up 3.7 per cent at $22.55. Stock in Goldman Sachs, the other surviving investment bank, also pared early losses but ended down 5.7 per cent at $108.

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