FTSE begins recovery after £36billion share write-off

Fears the economy is on the brink of recession sent the FTSE 100 Index tumbling as much as 2.8 per cent yesterday to its lowest level since November 2005.

The catastrophic fall saw the Footsie briefly drop below the all-important 5,384 level - 20 per cent below its peak last October and into a so-called 'bear market'.

But today the stock market was back in the black after better news from the US and Wall Street overnight and a rescue for beleaguered bank Bradford and Bingley.

On the slide: A Bloomberg screen shows the FTSE falling yesterday as the City officially entered a Bear Market

A pledge from the Federal Reserve to support American banks saw the Dow Jones close up one per cent overnight, which had a knock-on effect back in London today.

The FTSE rose 66.7 points in the first hour of trading and was still up 76.9 points at 5517.4 by late afternoon, wiping out yesterday's 1.3 per cent fall.

The London Stock Exchange was the chief gainer. Its shares, which had fallen heavily yesterday, were up 100 per cent or 76.5p.

Banks were also performing better with Lloyds TSB up nearly seven per cent or 19.5p and Royal Bank of Scotland and Barclays enjoying similar sizeable gains.

In the FTSE 250,  housebuilding firms were also looking more solid despite Redrow and Bovis both announcing more job cuts this morning.

The increases will be a relief after growing panic yesterday as the 100 Index moved into 'bear' territory, which investors take as a signal to sell up in favour of safer stocks.

The FTSE dropped as low as 5,358 at one point during the day, down more than 154 points, but rallied to close down 72 points at 5,440.5.

The sell-off will send shivers down the spine of the legions of small investors across Britain. Millions more could be affected as almost all company pension funds put money in shares.

More than £250billion has now been erased from the value of Britain's leading shares since the credit crunch started last summer following the collapse of the U.S. low-income property market.

The latest plunge was triggered by a stark warning from the British Chambers of Commerce that the economy may be only months away from going into recession.

Businesses have put the brakes on investment amid a growing mortgage drought, falling house prices and sky-high energy and food costs, said the lobby group.

Shares in Britain's biggest banks fell sharply on fears that an economic reverse will see tens of thousands of homeowners default on their mortgages.

Investors also took fright at speculation that America's two biggest mortgage companies, state-backed Fannie Mae and Freddie Mac, may need to raise £38billion in fresh capital to cover mounting property market losses.

Bradford & Bingley lost another fifth of its value as it emerged that the six major High Street banks have stepped in to safeguard its attempt to raise £400million.

Even Barclays, which claims to have been largely immune from the sub-prime crisis, fell back after shutting a specialist home loan division with the loss of around 300 jobs.