London's leading stocks rallied by nearly 190 points this morning, following the US Government’s bailout of Freddie Mac and Fannie Mae, the country's two stricken mortgage lenders, last night.

Just minutes after the beginning of trading, the FTSE 100 leapt 3.6 per cent, or 187.1 points, to 5427.8, reflecting strong overnight gains on the Hang Seng and the Nikkei 225 Index in Asia.

Experts said that the troubled US mortgage lenders were just weeks away from collapse, given the fallout of the credit crunch and the vast number of people struggling to keep up with their repayments.

Last night, the US Government pledged up to £110 billion of tax payers' money to keep the mortgage lenders, which together control £3 trillion in home loans, afloat.

While London's stocks rose strongly as relieved investors went into the market this morning, the rally was halted within two hours of trading because of a technical glitch. At the same time, in Frankfurt, shares in Fannie Mae and Freddie Mac were suspended from trading.

The London Stock Exchange blamed "connectivity issues" for the problem.

Banks led the early charge in London as Barclays rose 13 per cent and HBOS, owner of Halifax, the UK mortgage lender, soared 12 per cent, while Wolseley, the building materials group which generates large amounts of revenue from the US, climbed 11.3 per cent.

David Buik, analyst at BGC Partners, the City spread betters, said: “I think God help us it if this rescue deal had not happened; the US economy would have entered a five-year downwards cycle.

“It’s the biggest insurance policy the stock market has ever been given and I expect there will be a strong reaction, perhaps too much."

Last week, London's FTSE 100 closed the week down 7 per cent — its worst week's trading in six years — after investors were spooked by poor employment data from the US as well as lingering concerns about the stability of Freddie Mac and Fannie Mae.

However, last night's bail out by the US Government sparked an immediate reaction in Asia as reassured investors pushed Japan’s Nikkei 225 Index up more than 3 per cent, or 412.23 points, at 12,624.46. Hong Kong’s Hang Seng Index closed up 860.99 points at 20,794.27, a rise of 4.3 per cent.

The US Government has taken control of both groups and promised to inject up to billions of US taxpayers' money as one of a series of measures designed to restore order to America's stricken financial system.

Others included the ousting of the chief executives of both companies and the elimination of future dividends to shareholders.

It emerged today that Daniel Mudd, the departing head of Fannie Mae and Richard Syron, who is set to leave Freddie Mac, will share in a combined payoff of $23 million (£13 million) when they leave the mortgage groups.

Mr Mudd is expected to receive $9.3 million in pay and retirement benefits under the terms of his contract, while Mr Syron could walk away with $14.1 million.

The US Government's decision to guarantee the survival of the two groups is good news for British banks and, in turn, British homeowners.

British banks have invested billions of dollars in bonds insured by Freddie and Fannie and they could have translated into huge losses if either group had gone under, leaving banks with even less money to make available for mortgages.

President George Bush said the failure of Freddie or Fannie would have been "unacceptable".

He added: "Allowing the companies to fail or further deteriorate would damage our home mortgage market, and could weaken other credit markets that are unrelated directly to housing.

"Americans should be confident that the actions taken today will strengthen our ability to weather the housing correction and are critical to returning the economy to stronger sustained growth."

Henry Paulson, the US Treasury Secretary, said: "A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit.

"Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe."

Explore Markets

• United States

• Europe

• Japan

• China

• Russia

• The Gulf

• India

• Africa

Times Recommends

• Bank slashes rates by 1% to historic low
• House prices fall at fastest pace in 25 years
• Dragons’ Den judge exits Woolworths bid race