A US government bail-out of mortgage giants Fannie Mae and Freddie Mac triggered early morning gains for the FTSE 100 Index - until links between traders and the exchange were severed from just before 9am.
The LSE managed to restart normal trading in London at 4pm, with the Footsie easing back slightly following the morning's 3.8 per cent rise. It is the longest market stoppage since April 2000.
The market's resumption came well after the opening of Wall Street, when the Dow Jones Industrial Average rose more than 2 per cent as investors welcomed the removal of uncertainty following the mortgage intervention.
The LSE decided not to extend the market's trading hours beyond the normal closing time of 4.30pm.
Officials have not elaborated on the cause of the disruption, which they have put down to "connectivity issues".
City veteran David Buik, from BGC Partners, branded the stoppage a "shambles" that "paralysed share trading in London on what might have been the busiest day this year".
He also queried why the world's third largest exchange in terms of share volumes traded did not appear to have successful back-up systems.
"For the life of me, I cannot understand why the LSE system is not run in duplicate. So much and so many clients rely on the LSE's durability. They cannot afford to be let down," he said.
It is thought as much as £120 million of FTSE 100 Index business was stuck in the system. At the same time, investors would have missed out on the chance to buy into the upward momentum offered by today's positive sentiment, while hedge funds were also powerless to close out earlier positions.
Justin Urquhart Stewart, a director at Seven Investment Management, added: "There's been some fury among traders who have wanted to go in. The market has been moving very quickly, and in volatile markets like these you rely on trading systems being there so you can carry out your work."
The collapse is particularly embarrassing for LSE chief executive Clara Furse, who is facing increased competition from rival trading exchanges.
In a letter to the Financial Times, published today, she said better use of technology had seen the Exchange's share trading in UK equities exceed 50 per cent.
But she added: "The emergence of new trading platforms should test the attractiveness of our services."
Shares in London Stock Exchange Group have fallen more than half since the start of the year.
The FTSE 100 Index - which measures the share prices of the UK's top 100 listed firms - froze at 5440.2 at 9.17am.
By mid-afternoon the LSE said it was "continuing to establish connectivity with its customers", but officials were unable to say when normal trading would resume or what the cause of the problem was.
The glitch saw City institutions resort to "blind trading" between themselves, as well as relying on other rival pricing mechanisms to do business.
The last stoppage took place on April 5 2000, again due to a technical glitch.
There was speculation today's problems may have happened as LSE systems struggled to cope with the high volume of trades this morning. Bank shares were particularly in demand today, with HBOS up 13 per cent and Barclays 12 per cent ahead.
Keith Bowman, equity analyst from broker Hargreaves Lansdown, said around 270 million FTSE 100 Index company shares were traded this morning before the suspension.
The whole of last Monday - a quieter session because of the closure of US markets - saw 617 million blue chip shares bought and sold, he added.
Stock markets were buoyed by yesterday's intervention into America's Fannie Mae and Freddie Mac, which own or guarantee more than five trillion US dollars (£2,800bn) worth of mortgages between them.
The pair have lost more than 14 billion dollars (£8bn) in the past year due to the slumping US housing market but their collapse would cause global turmoil as their bonds are held by major investors worldwide.
The US Treasury placed the duo into a "conservatorship", replacing the bosses and effectively wiping out existing shareholders in the two firms, who have in any case seen the value of their holdings fall by more than 90 per cent in the past year.
The US taxpayer could be exposed to tens of billions of dollars in soaring mortgage defaults at Freddie Mac and Fannie Mae, but US Treasury Secretary Henry Paulson stressed that the impact of allowing the two to fail would be far more serious.
Paris's Cac 40 soared 4 per cent in the wake of the news, with Germany's Dax up more than 3 per cent. Asian markets were also well up overnight.
Another major electronic exchange, the Intercontinental Exchange (Ice), also shut down its operations today as a result of "technical issues".
Ice, which is based in the US but has major operations in London, closed its futures and other specialist financial contract markets for around an hour.
A spokeswoman said it was not thought the stoppage was linked to the LSE problems.
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