O'Neill seeks to soothe investors' nerves with praise for strength of US economy

Paul O'Neill, the US Treasury Secretary, made his first major intervention over the financial markets crisis yesterday, saying the economy was "fundamentally strong".

Mr O'Neill, who was accused of globetrotting while Wall Street crashed, said the recovery was "well under way".

The market initially reacted well, building on its historic 490-point rise on Wednesday night, and brushing aside weak economic data and news of an accounting investigation at media megalith AOL Time Warner.

"In our history we have seen times when there is a disconnect between the stock market and the fundamental productive power of our economy," he told the National Association of Manufacturers.

"This is such a time but, over time, the market will again focus on the economy's fundamentals. The reality is that our economy remains solid and our recovery is well under way."

When asked about recent slides in the markets, Mr O'Neill said the administration did not comment on market performance, but said he allowed himself to "smile" after the Dow Jones index soared almost 500 points on Wednesday.

Although Mr O'Neill has been criticised for embarking on international meetings during the crisis, his intervention proved more successful than those of the US President George Bush, who has seen the market fall each time he has tried to bolster opinion.

Yesterday was another roller-coaster ride as the Dow swung between a deficit of 117 and a gain of 117 in early trade and was off 48 points by lunchtime.

Confidence was momentarily hit by news that orders for costly durable goods and sales of homes had both fallen. Orders for durable goods fell 3.8 per cent in June – the largest drop since a 5.9 per cent fall last November. That was worse than forecasts for a 0.7 per cent rise and compared with a 0.6 per cent climb in May. Sales of existing, rather than newly built, homes fell 11.7 per cent in June, the worst drop since April 1995.

But analysts said speculation of an imminent interest rate cut was overdone as the Federal Reserve would want to see signs of a collapse in consumer spending and sentiment before acting. European markets built on the early climb on Wall Street, with the FTSE 100 gaining5 per cent, its best percentage gain since April 1992.