Modest recovery for world markets

Hopes of a fresh round of fiscal stimulus measures today helped London's battered shares index dodge its longest losing streak for eight years.

The FTSE 100 Index clawed back the 5% losses it suffered in the morning to close up almost 2% in a volatile day of trading in which it swung more than 300 points.

This meant the market avoided its eighth consecutive day of falls, which would have been its worst run since January 2003.

The reversal in fortunes came amid speculation that the US Federal Reserve would announce a third round of money printing, or quantitative easing, later today, to help inject some life into the world's biggest economy.

World markets grew in confidence, with the Dow Jones Industrial Average in the US up 2%, while the CAC 40 in France also saw gains of more than 1%.

The FTSE 100 Index has tumbled some 10% in the past two weeks amid panic that the eurozone will be crushed under the weight of its debts and the US will lead the world back into recession.

Eurozone leaders have intervened in bond markets to shore up the finances of debt-ridden Italy and Spain earlier this week.

Traders have now pinned their hopes on Federal Reserve chairman Ben Bernanke taking action to restore confidence after it was stripped of its AAA credit rating for the first time.

Clem Chambers, chief executive of financial website ADVFN, said: "This volatility is classic stock market crash behaviour, as investors and traders become bi-polar in their dealings.

"The market is waiting for QE3 from Bernanke and if it is announced the market will rally hugely.

"If there is no shock and awe from the Fed, the Dow Jones will roll over and head towards 10,000."

Louise Cooper, an analyst at BGC Partners, also warned of a bloodbath on equity markets if the Fed "doesn't come up with something soon".

Earlier in the day, the FTSE 100 Index fell below the 5000 barrier for the first time since July but it closed up 95.9 points at 5164.9.

Traders are terrified that the stock market falls could help push the global economy into recession by destroying consumer confidence, prompting traders to dump more stocks and creating a vicious circle.

Despite today's improvement, the FTSE 100 Index has lost around 900 points in the space of a month and yesterday posted four consecutive sessions of triple-digit losses for the first time in its 27-year history.

Michael McCarthy, chief strategist at Sydney-based stockbroker CMC Markets, said the struggling US economy was quickly losing momentum.

"We're clearly in fear territory. The major driver here seems to be weakness in the US economy. There are fears that it's starting to stall and, if that's the case, the whole global growth scenario could fall over."

Banking shares continued to bear the brunt of the turmoil as investors fretted about their exposure to indebted economies, such as Spain and Italy, and after heavy losses for counterparts in New York last night.

Taxpayer-backed Royal Bank of Scotland was among the FTSE 100 Index's biggest fallers, down 4%, although at one point it had been down 10%.

It has now lost about a quarter of its value in the past two weeks, and at 26.2p per share is about half the Government's break-even point of 51p. Lloyds, which was also bailed out by the Government, fell 2%.

The price of gold had soared to highs of 1772 US dollars per ounce earlier today as it was seen as a safe haven amid the chaos, although it too began to fall back as the panic eased.

Oil prices, which are often seen as an indicator of optimism in the global economy, made slight gains after reversing a 3% decline earlier in the day.