Russia’s central bank has taken drastic action to halt the rouble’s freefall on the foreign exchanges by raising interest rates by 6.5 percentage points to 17%.

After a day of turmoil dominated by fears that a crashing global oil price would devastate Russia’s energy-dominated economy, an after-hours meeting of the central bank in Moscow decided emergency action was needed to prevent the rouble’s collapse.

The bank said the increase in borrowing costs – which will deepen Russia’s recession if sustained for a prolonged period – was needed to end currency depreciation and to combat inflation.

Higher interest rates tend to make currencies more attractive to foreign investors and the rouble rose against the dollar in the wake of the surprise announcement.

Earlier, a 10% fall in the value of the rouble against the dollar had badly rattled global markets, with the FTSE 100 index in London closing at its lowest level of 2014.

Investors dumped shares as they weighed up the risk that a deepening economic crisis would destabilise Russia and make it more difficult for the west to deal with its president, Vladimir Putin, adding to geopolitical tensions in eastern Europe and the Middle East.

The huge jump in interest rates was seen by analysts as an attempt by the central bank to show that it was determined to protect the rouble. A smaller one-point rise to 10.5% last week had failed to impress financial markets at a time when the price of oil was plunging to a five and a half year low.

Earlier, Russia bought roubles for dollars on the foreign exchanges but failed to prevent the biggest one-day decline in the currency since Russia’s debt default in 1998.

The fall meant it took 63 roubles to buy a dollar, a decline of 45% since the start of a year that has seen the price of oil drop from $115 a barrel (£73) to barely $60 a barrel.

In London, the FTSE 100 index of leading shares fell for the sixth day in a row, with energy companies particularly hard hit by the drop in Brent crude to about $61 a barrel.

The FTSE has lost 9% since the start of last week and closed at 6182 points. They day’s 118-point fall means it is more than 500 points lower than its level at the start of the year.

Although the near-halving of the cost of crude oil since the summer should eventually boost global growth by increasing consumer spending power and reducing business costs, investors are concerned that lower oil prices reflect softer demand from a weakening global economy.

Major European bourses lost 2% of their value as the rouble fell against the dollar despite the efforts of the Russian central bank.

Neil Shearing, chief emerging market economist at Capital Economics, said there was now speculation that Russia would resort to capital controls to defend the rouble.

Oil and gas account for 70% of Russia’s exports and Moscow needs an oil price in the region of $100 a barrel to balance its budget. Even before the dramatic announcement of the interest rate rise, the central bank said the economy would contract by 4.5% in 2015 if the oil price remained at its current level for the next 12 months.

Oil prices came under renewed downward pressure on Monday after Opec stressed it had no immediate intention of curbing production. Some analysts believe Saudi Arabia and the US are deliberately pushing oil prices lower in order to put pressure on Putin. Washington is contemplating tougher sanctions against Russia for its support to separatists in eastern Ukraine.

Neil Barnett, of the Centre for Policy Studies, said: “The bad news for Russia is that the outlook for oil prices appears weaker and weaker. This week, the International Energy Agency cut its demand growth forecast. In combination with still-growing US production and Saudi determination to keep prices low, it means that prices next year are likely to fall yet further.”

Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “The pace of the fall has been breathtaking, with oil-related stocks bearing the worst of the pain. We are now closing in on a technical correction [10% fall] after just six abysmal trading sessions. To give some perspective, we already witnessed a 10% fall in the UK market in September and October of this year, but this took place over six weeks, not six days.”