Share prices regained a degree of stability, with the FTSE 100 index ending down just 29.9 points after Wednesday's 184-point drop.
However, investors remain nervous amid speculation that Brazil will be forced into further devaluations. Standard & Poor's, the credit rating agency, downgraded Brazil's debt ratings, citing "heightened risks to financial recovery".
Gordon Brown, the Chancellor of the Exchequer, reassured cabinet colleagues that the UK was well placed to weather the Brazilian storm. Tony Blair said the developments underlined the need for reform of the international financial architecture, a topic to be tackled by Mr Brown in a keynote speech in Bonn, Germany, on Saturday.
Gerhard Schroder, the German Chancellor, said he hoped the world's seven richest nations would agree reforms of the international monetary system at a June summit in Cologne.
The International Monetary Fund is to hold crisis talks with Brazil following the devaluation, which breached the conditions of its $41bn rescue package.
Michel Camdessus, IMF managing director, said: "We will be analysing the implications of the developments for the components of the policy framework endorsed by the executive board". According to Mr Camdessus, Brazil has reaffirmed its commitment to economic reform.
In a sign of growing concern in Washington, Larry Summers, Deputy Treasury Secretary, postponed a trip to Asia.
On Wednesday there was chaos in the markets after the Brazilian central bank governor resigned and the government announced an effective 9 per cent devaluation of the real.
Yesterday the currency was holding its ground, but analysts remained convinced that further devaluations were inevitable. Nick Stamenkovic at Bank Austria Creditanstalt Futures said: "Time is running out for Brazil and I believe further devaluations are likely. It's seen as fodder for the speculators, just as Russia was."
The persistent worries about Brazil sent Wall Street lower, with the Dow Jones Industrial Average down 112 points - or 1.2 per cent - in afternoon trade. News that US inflation hit a 12-year low last year did little to lift the gloom.
Wall Street's jitters hit sentiment in London, although the FTSE 100 held its day's loss to 0.51 per cent, ending at 5,820.20.
In Frankfurt, the DAX Xetra index closed 1.6 per cent lower, with sentiment dented by the outlook for growth. The German economy grew by 2.8 per cent in 1998 - a post-reunification record - but economists estimated that fourth-quarter growth was just 0.1 per cent.Reuse content