Sweeping government measures to rescue the financial system and restore confidence in shaky markets spurred a huge rally in US and European stocks on Friday, at the end of a week of dramatic financial turmoil.
The benchmark S&P 500 index had its biggest two-day rally since October 21, 1987, two days after the 1987 stock market crash.
Led by US Treasury Secretary Henry Paulson, officials are working on a solution to mop up hundreds of billions of dollars worth of bad mortgage debt.
In another extraordinary action, the United States temporarily banned the short selling of shares in financial companies so as to remove some of the speculative pressures on them.
That followed similar action in Britain, Ireland, France and Portgual. Australia plans to introduce the ban from Monday, while Swiss regulators have reminded investors the practice is not allowed on the Zurich exchange.
Short-selling is when an investor borrows a stock or investment instrument and sells it on the belief it will fall in price, allowing them to buy it back later more cheaply and so make a profit.
And the US Federal Reserve said it will use $US50 billion to back money-market mutual funds.
The moves came at the end of an agonizing week for Wall Street, in which Lehman Brothers filed for bankruptcy, insurer American International Group was bailed out by the government and Merrill Lynch was forced into a shotgun marriage with Bank of America.
Even with the furious two-day rally, stocks still ended essentially flat in a week marked by extreme volatility, with the Dow plummeting more than 500 points on Monday, only to rise on Tuesday and drop again on Wednesday.
The Dow Jones industrial average closed up 368.75 points, or 3.35%, at 11,388.44. The Standard & Poor's 500 Index advanced 48.57 points, or 4.03%, to 1,255.08. The Nasdaq Composite Index shot up 74.80 points, or 3.40%, to 2,273.90.
Shares of Washington Mutual surged 42.1% to $4.25 after the Wall Street Journal reported that Citigroup was considering making a bid for the US savings and loan.
Citigroup shares leaped 22.7% on the New York Stock Exchange.
Shares of Morgan Stanley, punished earlier this week as investors fretted about the outlook for the last two remaining US investment banks, jumped 20.7% . Shares of rival Goldman Sachs climbed 20.2%.
European stocks soar
European stocks also soared on Friday driven by massive gains in the banks after the US government revealed it planned to spend billions of dollars to mop up bad debts fuelling the global financial crisis.
The FTSEurofirst 300 index closed 8.2% higher at 1,150.78 points, recouping some of the sharp losses from earlier in the week and notching up the biggest one-day percentage gain on record
In London, the FTSE 100 index of leading companies rose 8.84 per cent to close at 5,311.30 points.
In Paris, the CAC 40 jumped 9.27 per cent, its largest one-day gain, to 4,324.87 points, and in Frankfurt, the DAX was up 5.56 per cent at 6,189.53 points.
All three markets easily regained key support levels that had been breached earlier in the week in some of the most tumultuous trading on record.
Dealers said the banks, many posting gains of 30% and 40%, were in focus as Washington prepared a plan to tackle the mountain of bad debt that has weighed them down in the past year and sparked a global credit crunch.