UK next to make rate cut

Expectation was hardening in the City last night that the Bank of England would join in the coordinated effort to safeguard the global economy by cutting interest rates as soon as today.

Dealers in London believe the Bank's nine-strong monetary policy committee will very soon cut interest rates, already at a 40-year low, in response to yesterday's emergency action by the Federal Reserve and the European Central Bank.

Although shares in London rallied strongly yesterday afternoon to close 143 higher at 4,898, dealers feared the continued weakness on Wall Street after Europe's markets closed might means that selling will resume in the City today.

London rallied even though the Dow Jones index had fallen sharply, with dealers anticipating it could have been worse. The Dow Jones fell through the 9000 mark, shedding 600 points after trading resumed on Wall Street. The index had been paralysed at 9,605 for four days.

The US index is now back at a level last seen during the Asian crisis three years ago and has lost more than 2,500 points since its peak at the start of 2000. Last night attempts were being made to encourage investors to keep faith, after the patriotic rise predicted over the weekend failed to materialise.

Paul O'Neill, the US treasury secretary, forecast the Dow's return to record levels in 12 to 18 months.

Saudi billionaire Prince Alwaleed bin Talal, a prominent investor in technology stocks, also joined in the vocal support. He said: "The American economy is solid and I am not selling anything. I will not sell any of my shares in any company."

Echoing the view of many institutional investors, Steven Bell, global chief economist of Deutsche Asset Management, said: "We want to avoid making large and costly transactions with our clients' money. However, if prices move to a silly level and get mispriced we will act to exploit that."

Major investment banks, many of which have felt the devastation in Manhattan at first hand, were also said to be trying to keep a floor under the markets by showing reluctance to execute speculative sell orders.

While the Fed's rate cut helped to bolster confidence it did not prevent a flight to safer investments such as bonds - where prices had already factored in a swift and deep rate cut - and gold, which rose to levels last seen almost two years ago.

The hi-tech sector, the favourite investment arena for millions of small investors 18 months ago, continued to struggle when the Nasdaq resumed trading.

By early afternoon it was down more than 100 points, falling below 1600 - less than a third of its peak level.

The dollar also remained under severe pressure although news of the Fed action helped to trim its losses against the euro. Its low for the day was 93.33 but it then recovered slightly to 92.46.

In continental Europe, the surprise action by the ECB just as the bourses were due to close boosted prices sharply. Germany's Dax index rallied to close 126 points up at 4242 and the CAC index in France rose 105 to 4015.

On Wall Street, one of few categories of shares to rise was companies involved in the US office property market.Video rental firm Blockbuster was also up, on expectations that depressed Americans would choose to spend their evenings at home in front of the television.

Airlines were among the worst affected - UAL, the owner of United Airlines, saw its shares dive 42% in early trading to $18.50, while US Airways lost $5.06 to $6.56.

There was a knock-on effect on suppliers: United Technology issued what was expected to be the first of many profit warnings from the aerospace industry, saying demand for aircraft parts would be down.

Media company Dow Jones was also hit after admitting that it was feeling the impact of the much-dreaded US recession through lower advertising.

Other companies tried to bolster their share prices by buying back their stock at lower levels following a relaxation of the rules by the US authorities.

The reopening of the US stock market was regarded as the biggest test for the financial system since the terrorist atrocity which hit Wall Street and Washington a week ago today.

Financial regulators stepped up vigilance and were in close contact around the world to look for signs of pressure in the financial system caused by any sudden lack of confidence.

The Federal Reserve followed up its rate cut with regular injections of money into the system. This is designed to prevent any credit crunch caused by customers of banks failing to make payments on time.

"There's a lot of emotion in today's market as many people were affected by the tragedy," said Peter Coolidge, managing director of equity trading at Brean Murray & Co. "If you looked at trading in Europe and Asia before, you would have expected something of this magnitude or even a little bit more."