Banks isolate hedge funds as Wall Street gets safety net

Fed and US regulators move to shore up markets as traders forecast 10% fall in shares

Concerted efforts will be made to freeze hedge funds out of the US market when Wall Street reopens for trading today after its longest shutdown since the First World War.

Broking houses have instructed dealers not to "short" the market – selling stocks they do not own to drive down prices – and several large US institutions have decided not to loan stock to hedge funds, the traditional means by which the funds cover their short positions.

The voluntary action comes as the Federal Reserve and US regulators prepare a massive safety net to help support the market when trading resumes this afternoon after a four-day shutdown following the terrorist attacks on New York and Washington.

The Fed may announce a reduction in interest rates to help underpin the market and restore investor confidence. Central banks around the world, meanwhile, stand ready to pump billions of dollars into the American financial system to prevent a credit crunch. Gordon Brown, the Chancellor, said the UK was prepared to do "whatever is necessary" to avert a global slowdown.

Other measures being implemented today include a relaxation of the rules governing share buybacks to allow companies to support their own stock prices.

Despite the unprecedented array of measures, there are fears that the Dow Jones index may open as much as 10 per cent down today with airline stocks hardest hit as Wall Street reacts to the falls in other equity markets last week. Some New York analysts believe shares in American Airlines and United Airlines could fall by a half. The warning from Continental Airlines that it is shedding 12,000 staff and may file for Chapter 11 bankruptcy protection has heightened fears of a string of airline failures following the attack using hijacked aircraft.

Over the weekend the New York Stock Exchange confirmed that trading would resume today following the successful testing of computer systems and telephone link-ups to broking houses. Maintenance staff have also been working flat out to remove the thick layer of soot and dust which still blankets the heart of New York's financial area. Subway services are, meanwhile, being restored and a "corridor" has been cleared through lower Manhattan to enable the 4,500 people who employees work at the NYSE to get there.

"We are very confident that come Monday morning, the greatest economy on earth will be back in business," the chairman of the NYSE, Richard Grasso, said. "When that bell rings we will send an important message that the American way of life goes on."

In addition to the NYSE and the technology-laden Nasdaq index, New York's commodity markets, which trade everything from coffee to natural gas, are expected to resume trading today.

Not all institutions are prepared to join in the action to limit the freedom of the hedge funds. There is some concern that Friday's 4 per cent drop in the FTSE 100 index was due in part to a collapse in a gentleman's agreement among the funds not to trade aggressively.

The dollar also looks likely to come under heavy selling pressure again, having sunk to a six-month low against the euro last Friday. Normally the dollar strengthens at times of international tension but Bob Baur, chief economist at Investa Capital Management, said: "Money will tend to leave the US because this event happened here and from a dollar standpoint there will be a negative reaction."