Japan has followed in Switzerland's footsteps and intervened to stem the strength of its currency, which has been boosted by investors seeking safe-haven investments.

The latest move in the crisis that is gripping the financial markets came as shares fell sharply across Europe, leaving the FTSE 100 on track to close at its lowest level since last September.

The Bank of Japan sold more than one trillion yen (£7.7bn) during trading on Thursday, according to latest estimates, in an effort to drive down its value. It also eased monetary policy by expanding its asset purchasing scheme and offering more cheap loans to financial firms to encourage them to keep lending.

Finance minister Yoshihiko Noda said Japan had consulted its international partners but acted on its own. "Japan is just in the process of recovering from a natural disaster so these currency moves are certain to have a negative impact on the economy and financial markets," he said.

Japan's action brought little respite to the financial markets, following Wednesday's widespread heavy losses. A further bout of heavy selling sent the FTSE 100 index down another 71 points by noon to 5513.

There was little improvement in the euro crisis either, after Italian prime minister Silvio Berlusconi addressed parliament after markets closed on Wednesday and pledged to step up economic reforms. Italian government debt did recover slightly on Thursday, with the interest rate on 10-year Italian government bonds falling below 6% in early trading – the level that indicates whether traders have lost faith in a country's ability to service its debts.

However, Italian bond yields crept back up above 6% again later, as did Spanish 10-year yields.

Spain and Italy are at risk of a "market ambush", Citi's chief economist Willem Buiter noted on Wednesday, with their 10-year bond yields spiking to 6.46% and 6.26% earlier this week. "Belgium, too, is now suffering from contagion from the periphery and even France appears to be decoupling from core Europe."

Buiter, a former Bank of England policymaker, said the European crisis fund, the European financial stability facility (EFSF), should be expanded to €2.5tn. He said the proposed expansion to €440bn was "woefully inadequate" to fund Italy and Spain for an extended period.

"The EFSF will not have the ammunition to be a credible deterrent to a fear-driven market denial of market access to the Spanish and Italian sovereigns. Furthermore, to use the EFSF effectively to manage crises, it must be able to fund itself at the speed of crises," he argued. "It needs, in our view, somewhere around €2,500bn to be a credible lender of last resort for solvent but illiquid sovereigns."

The euro rose 1% against the Swiss franc, a day after the Swiss central bank cut interest rates to tame its currency.

"Wednesday's calamitous session in Europe was rounded off with that heavy bout of selling on Wall Street which served to push the FTSE to its lowest close since November of last year," said Cameron Peacock, market analyst at IG Markets. "However, some upbeat earnings news from the US helped turn the tide and the bulls are starting to edge back in, with the Dow breaking its eight-session losing streak. The dilemma now is that equities are looking quite cheap and bonds rather more expensive, so this certainly has the potential to limit the downside even if concerns over the global economic recovery continue to linger."

Central banks in focus

The Bank of England voted to leave interest rates unchanged at noon. There were rumours that the European Central Bank could announce it was buying more bonds 45 minutes later, after its own monthly meeting.

Japan's intervention came after days of official warnings that the yen had risen so much that it threatened to derail the country's recovery from the devastating tsunami and earthquake in March.

On Wednesday, Swiss authorities moved to stem what the national bank called the "massive overvaluation" of the Swiss franc. The Swiss National Bank announced a surprise interest rate cut to ease buying pressure on its currency.

Japan's intervention pushed the yen as low as 80.19 yen to the US dollar, from 77.10 yen.