The FTSE 100 jumped almost 200 points following news the US government has taken over its biggest mortgage lenders.
Freddie Mac and Fannie May account for more than half of US mortgage lending and are at the centre of the sub-prime mortgage crisis.
The move was supported by US President George W Bush. He said the moves will “strengthen our ability to weather the housing correction, and are critical to returning the economy to stronger sustained growth in the future”.
The companies’ executives have been replaced by members of the Federal Housing Finance Agency.
Treasury secretary Henry Paulson said the plan was “the best means of protecting our markets and the taxpayers from the systemic risk posed by the current financial condition” of the lenders.
The credit crunch spread from US sub-prime payment defaults to UK lenders of mortgages for residential and commercial properties.