Shares fight back as European Central Bank pumps £32 billion into credit markets

The FTSE 100 Index closed up 3% at 6219 - clawing back some of the 350 points lost in just two days last week - as the European Central Bank and the US Federal Reserve pumped more cash into credit markets.

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However, analysts cautioned that the recovery could be short-lived with traders still spooked by fears of a global credit crunch.

The turmoil started after a series of defaults in the US sub-prime mortgage market, an industry which hands out loans to high-risk customers.

Some estimates suggest 300 billion US dollars (£150bn) of loans could be at risk, but at the moment investors do not know the exact scale of the problem.

James Hughes, an analyst at CMC Markets, said: "I wouldn't be surprised to see a short-lived recovery, but I think we still have losses to come."

He added that any bit of news is having an exaggerated effect on stocks, while opinions are very mixed about what turn global markets might take next.

A firm opening on Wall Street helped buoy investor sentiment, although Mr Hughes warned inflation data later in the week could spark a further market downturn.

Further respite came after lacklustre manufacturing data in the UK eased pressure on the Bank of England to impose a further interest rate hike in the near future.

The ECB moved to reassure investors that market conditions were "normalising" as it pumped a further 48 billion euros (£32.5bn) of funds into the banking system in an attempt to keep bank lending rates down.

The Federal Reserve also injected further cash following similar moves from the Bank of Japan earlier in the day.

Last week's uncertainty was sparked by fears over banks' exposure to losses in the US sub-prime mortgage market, with European banks BNP Paribas, Deutsche Postbank and Germany's IKB taking major hits from their investments in US real estate securities.

The resulting credit crunch, as banks increased the cost of lending, forced central banks to move in and pump more cash into banking systems to help soothe investor fears over a drying up of credit markets.

Mining stocks were some of the day's big gainers amid an uplift in copper and aluminium prices, while financial stocks also moved to recoup some of the losses from last week.

Charles Stanley Stockbrokers analyst Jeremy Batstone warned the market volatility was likely to continue.

"This entire period of economic expansion has been built on a vast amount of debt.

"Increase the cost of that debt, tighten loan conditions and one might be in for a bit more than just risk aversion," he said.