London shares shrugged off an overnight collapse on Wall Street as hopes grew that nationalised banks Lloyds and Royal Bank of Scotland are close to finalising terms of the Government guarantee on up to £500 billion of their most toxic assets.

Asian markets took fright at Wall Street's 250-point rout, which saw the Dow falling 3.4% to a 12-year low. Japan's Nikkei 225 lost 1.5% and Hong Kong's Hang Seng index 2.9%.

But London's FTSE 100 index opened just 30 points lower and rapidly gained ground to be down only 5.08 at 3845.65.

Manoj Ladwa, a senior trader at ETX Capital said: "The FTSE has fared better than expected. US futures are up 74 points - which has helped shares across Europe - although after yesterday's sharp drop in the States, it looks a lot like a dead cat bounce. There's a feeling that the worst might be out of the way, although really it's too early to say."

Lloyds and RBS topped the FTSE 100 best-performing shares with gains of 3% and 2% respectively. The banks are in final discussions with Treasury officials over the Asset Protection Scheme.

It now appears that the terms could be better than expected, with reports the Government will not enforce the 12% interest payment on its £4 billion of preference shares at Lloyds if it makes commitments to greater lending. It converted its £5 billion of preference shares into ordinary shares at RBS, but is not keen to do this at Lloyds because it would push the taxpayer stake from 43% to more than 50%.

Even if the details are slightly better than expected, the spectre of banks being nationalised around the world led most European stock markets lower today.

"The banking sector is again at the centre of the negative newsflow. Full nationalisations are more and more conceivable," said Jacques Henry, analyst at Louis Capital Markets in Paris."If we don't get a rebound soon, stocks can fall to much lower levels."