Leading bank shares around the world plunged yesterday after the crash of Lehman Brothers, forcing central banks to prop up the system with tens of billions of dollars. But US stocks rallied in the final hour of trading to close higher.

American Insurance Group (AIG) was the eye of the storm, with New York governor David Paterson warning the insurer had one day to raise $75-$80 billion.

After sliding about 150 points in early trading, Dow Jones Industrial Average closed at 11,059.02, up 141.51 points, or 1.3pc.

The S&P 500 gained 20.9 points, or 1.8pc, to 1,213.6, while the Nasdaq Composite climbed 27.99 points, or 1.3pc, to 2,207.9.

Stock markets took new fright yesterday after the Wall Street shocks, the bankruptcy of Lehman Brothers and bailout of Merrill Lynch by Bank of America.

The London and Tokyo markets dropped more than four per cent to their lowest points for more than three years with some leading bank shares dropping 20pc.

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India’s central bank said it will take temporary measures to contain excess volatility and ensure liquidity in India’s financial markets in the wake of global turmoil.

Starting today, the Reserve Bank of India will temporarily provide additional liquidity up to about $7.3bn to domestic banks.

Goldman Sachs, with Morgan Stanley one of two surviving independent US investment banks, reported a 70pc fall in third quarter earnings to $845 million.

But this was better than analysts had feared and chief executive Lloyd Blankfein reassured that the company was “well positioned.”

But the shock waves reached as far as Moscow where trading was suspended after a fall exceeding 11pc.

International Monetary Fund head Dominique Strauss-Kahn said that more banks could close in the crisis.

Shares in many top bank names around the world fell and fell despite central bank support of $210bn to prevent the financial system from seizing up.

This took the total of central bank money to douse the fires to more than $300bn in two days from the US Federal Reserve, European Central Bank and the Japanese and British central bank. But still fear was the key and took the upper hand.

In London, shares in HBOS bank rallied from a plunge of 35pc after the bank said it had a “strong capital base.”

Royal Bank of Scotland stock fell 9.74pc and Barclays was down about 14pc. Shares in the biggest Swiss bank UBS fell 20.15pc, and Swiss Reinsurer SwissRe was down 12.15pc.