Fear and loathing on world markets
All eyes on next move by America but economic outlook still gloomy
Hopes of a fresh round of fiscal stimulus measures yesterday 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 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 CAC40 in France also saw gains of more than 1%.
The FTSE 100 Index has tumbled some 10% in the past fortnight amid panic that the eurozone will be crushed under 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."
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 yesterday'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.
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 which owns Ulster Bank 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 (£1090) per ounce earlier yesterday 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. Meanwhile, the UK's economic forecasts will be slashed by the Bank of England today for the second time this year.
The Bank's quarterly inflation report is expected to predict that GDP in 2011 will rise by significantly less than the 1.8% it estimated in May .
The Bank is now expected to say that worries over the global economy and resulting stock market slump could further endanger the recovery.
The benchmark FTSE 1 had a swing of more than 3 points yesterday. The index suffered losses of 5% in the morning but managed to regain nearly 2% after a day of white-knuckle trading, closing up 95.9 points at 5164.9. The volte-face came amid growing speculation that the US Federal Reserve would launch a third round of quantative easing to inject some life into its flagging economy. That same hope helped coax the Dow Jones Industrial Average into going up by 2% while the CAC 4 in France went up by over 1%.