European shares closed higher yesterday, led by banks and oil stocks as world governments took steps to stem a global financial crisis, but some earlier gains were lost as a US rally dwindled on concerns for the economy.

The pan-European FTSEurofirst 300 index closed up 3.1 per cent at 966.12 points, adding to a more than 10 per cent rally on Monday when it posted its biggest ever daily percentage rise. However, it had been up as much as 6.5 per cent earlier in the session, before the US opened. The index has lost 35.8 per cent this year.

Banking stocks helped to boost the index. Credit Suisse rose 15.2 per cent; Barclays surged 14.3 per cent, UBS added 12 per cent, Standard Chartered put on 10.5 per cent, and Société Générale rose 8.2 per cent.

President George W. Bush said the US government would directly inject capital into financial institutions by buying equity stakes in a bid to help thaw credit markets frozen by the housing market collapse.

"This is an essential short-term measure to ensure the viability of America’s banking system," he said after meeting with his top economic advisers, adding that the new capital would encourage banks to lend again, which would spur job creation and economic growth. The US move follows a similar concerted European drive announced on Monday.

But US stocks, which posted double-digit percentage gains on Monday, were mostly negative when European bourses were closing for the day, as US investors fretted over the outlook for corporate profits.

"The American market is pleased about the rescue plan for banks, but industrials have taken a bit of a beating today," said Roger Cursley, a strategist at Investec. "We’re looking at difficult economic times ahead. And then there’s the problems with Dexia."

Sign up to our free newsletters

Get the best updates straight to your inbox:
Please select at least one mailing list.

You can unsubscribe at any time by clicking the link in the footer of our emails. We use Mailchimp as our marketing platform. By subscribing, you acknowledge that your information will be transferred to Mailchimp for processing.