Central bankers around the world took emergency action to end the market meltdown today with co-ordinated interest rate cuts designed to give the global economy a lift in the face of recession.

The Federal Reserve led the way, slashing its key federal funds rate by half a point to just 1.50 per cent. At the same time, the Bank of England cut its base rate by the same amount to 4.50 per cent and the European Central Bank also announced a half-point cut to 3.75 per cent. The Swiss, Canadian and Swedish banks joined in while China also trimmed rates.

The co-ordinated cuts were announced at midday, UK time, as Gordon Brown prepared to take MPs questions on a radical £500 billion package to restore confidence in the UK banking sector and breaking the crippling logjam in credit markets.

As the Prime Minister stood up the rate cut news flashed across trading screens in the City, giving an immediate boost to the FTSE 100 and other European stock indices and diverting attention from the Prime Minister's performance.

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The Bank of England had been due to update rates tomorrow after a scheduled meeting today of its Monetary Policy Committee. In the event, that meeting was brought forward several hours and the rate cut was announced exactly 24 hours early.

There were signs that the co-ordinated move had been planned for several days as it emerged that the Bank of Canada's rate-setting committee held its emergency meeting yesterday.

It was the BoE's first emergency rate cut since September 2001, when the terror attacks on New York and Washington threatened to destroy global market confidence. That was also the last time central bankers cut rates together, although in 2001 the cuts were not simultaneous.

The co-ordinated rate cuts were accompanied by a joint statement in which the banks explained that inflationary pressures had begun to ease, especially given the intensification of the financial crisis. "Some easing of global monetary conditions is therefore warranted," the statement said.

In a separate statement, the BoE added that UK inflation was likely to climb above 5.0 per cent in coming months, but should then drop back as lower energy prices, combined with spare capacity in the economy, kicks in.

The cuts failed to lift investor gloom, however. The FTSE 100 had been trading about 2 per cent down before the rate cuts were flashed across City dealer screens and spun briefly into positive territory before falling back into the red and ending down 5.18 per cent at 4,366.69 points. Other European markets saw similar or even greater falls.

Wall Street was volatile, although mostly in the red. The Dow Jones Industrial Average was down 125.33 points, or 1.3 per cent, at 9,321.58, at mid-session having been up nearly 200 points earlier in the day.

The three-part bank rescue package includes committing up to £50 billion of taxpayer funds for a partial nationalisation of stricken banks, met from increased public borrowing and with political strings attached that would include reining in executive pay.

In addition, the Bank of England will pump at least £200 billion into the money markets under its existing Special Liquidity Scheme. The Government is also making a further £250 billion available for banks over the next three years to guarantee medium-term debt to help restore confidence and get banks lending to each other again.

The deal was hammered out in talks with banking chiefs that dragged on into the early hours and at joint press conference in Downing Street today both Mr Brown and Alistair Darling, the Chancellor, were keen to draw a distinction between their rescue plan and the $700 billion US bailout involving the purchase of "toxic" assets.

"All these are investments being made by the Government, which will earn a proper return for the taxpayer," Mr Brown said.

A key element of the deal is a government-supported recapitalisation under which eight major lenders have agreed between them to raise their Tier 1 capital – the main measure by which regulators assess a bank's strength – by £25 billion between them.

The Treasury is offering to fund that recapitalisation, meaning a partial nationalisation and a dilution of existing stockholdings, as well as offering a further £25 billion to buy preference shares or PIBs – permanent interest-bearing shares.

But not all of the banks involved will take taxpayer cash to strengthen their Tier 1 capital. Both HSBC, the country's biggest banking group, and Standard Chartered, said today that they would not need public funds and only Royal Bank of Scotland said that it would do so.

Addressing MPs at Prime Minister's Questions, Mr Brown took the chamber by surprise by revealing the emergency rate cut, which he haled as evidence that the Government was prepared to do everything in its power to help businesses, mortgage-holders and consumers.

As the financial crisis dominated the first question time since the summer recess, he also disclosed that the Government would also be seeking to pay small businesses with public contracts within ten days to help ease liquidity problems.

The Tory leader David Cameron again offered support for the Government’s response to the crisis, insisting that the banking system could not be "allowed to fail".

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