After a week of misery, FTSE adds £100bn in a day

THE stock market soared to its biggest-ever one-day gain yesterday as financial stocks got a double-barrelled boost from the British financial regulator and the US government.

Britain's blue-chip FTSE 100 index closed up just under 9 per cent, or 431.3 points, at 5,311.3 following the Financial Services Authority's announcement on Thursday of a temporary ban on "short-selling" financial stocks.

The practice of speculators betting on share price falls is widely seen as a key reason why HBOS shares suffered a sustained battering, allowing Lloyds TSB to mount a rescue takeover bid.

British blue-chip shares also benefited yesterday as US Treasury secretary Hank Paulson confirmed he was discussing a plan with Congress to create a giant "bad bank" to contain all the toxic bank debt that has triggered the global credit crunch.

The US also announced a temporary ban on shorting financial stocks, as did several other financial regulators across the world.

Richard Hunter, head of equities at broker Hargreaves Lansdown, said the twin developments had led to "a collective sigh of relief" in the markets.

The surge in London added more than £100 billion to the value of the Footsie, with other markets also joining the party. Hong Kong's Hang Seng index rose 9.6 per cent, Japan's Nikkei 225 closed 3.8 per cent higher, while in Europe France's CAC 40 shot up more than 9 per cent and Germany's DAX added 5.6 per cent.

Wall Street's Dow Jones industrial average was up 4 per cent in afternoon trading.

Paulson told a Washington news conference that the proposed bailout could cost "hundreds of billions" of dollars, but was better than the dire alternative of prolonged turmoil freezing banks lending to each other.

Hunter said: "We have had the US pledging to form some sort of entity to deal with toxic assets, and a crackdown on short-selling financial stocks on both sides of the Atlantic.

"Previously those sellers were pushing against an open door. So now there is a real possibility of more realistic prices returning to shares."

Hunter added that the stock market now needed a few weeks of stability to consolidate the feeling of returning banking confidence.

"We are not out of the woods yet. But today's developments are definitely a step in the right direction, and hopefully we are moving to the beginning of the end of the sector's problems."

Tom Hougaard, market strategist at financial spread betting firm City Index, said: "The short-sellers have just been handed a death sentence, they are totally screwed.

"The market makers will be saying 'Let's see how far I can squeeze these boys before they really start squeaking'."

One analyst said: "They (speculators] will have to buy them at a loss having gambled on bank prices going down."

Bank stocks were the biggest market gainers yesterday.

Royal Bank of Scotland leapt 32 per cent to 213.5p, while HBOS and Barclays both jumped 29 per cent, to 222.5p and 389p respectively. Lloyds TSB closed up 20 per cent at 287.75p.

• Lloyds TSB announced a placing of 5 per cent of its shares to raise an estimated £843 million yesterday, helping to improve its capital position.