Wall Street rallies on car hopes

US shares have climbed on hopes that the government will intervene to help carmakers after the Senate rejected a $14bn (£9.4bn) bail-out.

Suggestions that the White House may step in with funding saw Wall Street claw back early losses with the Dow Jones index ending 0.8% higher.

Earlier London's FTSE 100 closed 2.5% down while The Cac-40 lost 2.8%.

The failure of the bail-out to get Senate support had raised fears of a possible industry collapse.

But the White House said it was considering using money earmarked to rescue US banks to bail out the car industry.

Meanwhile the Nasdaq index closed 2.2% higher as investors bought into technology firms.

Observers said the move was driven by bets that the large stockpiles of cash at technology companies would help them weather the economic downturn.

Worried markets

"If one of the big auto companies goes bust in the US, this could see a collapse in the entire supply chain"
Heino Ruland
FrankfurtFinanz

White House considers auto rescue

Q&A: Auto bail-out

If US carmakers did go under, European and Asian carmakers could also be affected.

"If one of the big auto companies goes bust in the US, this could see a collapse in the entire supply chain. Groups like BMW, Honda and Nissan rely on this supply chain and they would suffer," said Heino Ruland at FrankfurtFinanz.

But it is not just the carmakers that have worried markets.

News that Bank of America plans to cut 35,000 jobs pushed financial stocks lower across Europe.

"The US economy like other developed economies is going to contract in 2009 and that makes the first half of 2009 quite problematic for equity markets," said Darren Winder, equity strategist at Casenove.

Stimulus package

In Asian trade, Japan's Nikkei share index fell 5.6% while Hong Kong's Hang Seng index sank 6.9%. Other regional markets also fell.

Following the market falls. the Japanese government announced a 23 trillion yen (£170.8bn; $254.6bn) stimulus package.

The package is designed to boost employment, encourage lending and inject capital into financial markets.

Ten trillion yen will go on tax breaks and public financing while 13 trillion yen will be used to prop up financial markets.