The Bank of England moved to pump £5bn into frozen money markets today as London's leading shares tumbled on the latest impact of the credit crunch.
Policymakers made the move to ease overnight lending rates between banks spooked by the bail-out and the cut-price sale of troubled investment bank Bear Stearns.
London's FTSE 100 Index fell more than 2.5 per cent as leading banks such as Halifax Bank of Scotland and Barclays bore the brunt of the sell-off.
The Bank of England's intervention is its first such move in six months since the height of the credit crunch. The £5bn was only about a fifth of what banks had called for.
Last week, Bank policymakers also unveiled £10bn in loans in an attempt to bring down the rates at which banks lend to each other for three months, which have also soared.
Banks, fearful of losses, are hoarding cash to bolster their balance sheets, pushing the three-month interbank lending rate to its highest point this year today. It currently stands at 5.96 per cent -- well above the official 5.25 per cent base rate.
The Bear Stearns crisis, which raised the spectre of Northern Rock, led to heavy losses on Asian stock markets, with Wall Street expected to open sharply lower later today as the sell-off spreads wider.
Prime Minister Gordon Brown's spokesman said the Bank of England, the Treasury and the Financial Services Authority had been monitoring developments here and in the US.
He said: "The tripartite authorities here in the UK have been in close contact with their US counterparts over the weekend and are continuing to closely monitor developments in the markets."
The investment bank became the the latest victim of the turbulence after being forced to seek emergency funding on Friday. It was bought by rival JP Morgan Chase for a cut-price $236.2m (£116.4m) yesterday.
The US Federal Reserve, in a rare Sunday meeting, cut its lending rate to banks to 3.25 per cent from 3.5 per cent and created another short-term loan facility for big investment banks in an attempt to ease the pressure.
Panmure Gordon banking analyst Sandy Chen said: "We interpret this as a clear indicator that other firms may be vulnerable."
Meanwhile, oil prices soared to new records near $112 a barrel as fears over the US economy grew and the dollar weakened to a record low against the euro.
The Fed is likely to cut interest rates again at its meeting tomorrow to spur on the world's largest economy, which is teetering on the brink of recession.
Bear Stearns -- bought for just two dollars a share by its rival -- was heavily exposed to the mortgage-backed investments hit by the credit crunch. Two of its hedge funds collapsed in July last year in one of the early signs of the approaching crisis.
Last week rumours of problems at the business swept the market, leading to a cash crunch for the firm. The bank looks after millions of dollars for hedge funds, which began demanding their money back as the rumours grew and the company had no deposit base to fall back on.