Shares on Wall Street entered positive territory this afternoon, helping the London stockmarket recover from heavy losses racked up earlier in the day.

The Dow Jones industrial average rose 162 points to 8541 by 5.30pm, up nearly 2%, after falling earlier. In London, the FTSE 100 index closed down 30.77 points at 3862.59, a fall of 0.79%.

During morning trading, the FTSE 100 fell by more than 5%, or 218 points, to 3665.21, the lowest level it has reached in recent weeks, with the prospect of a deep worldwide recession continuing to haunt investors.

Stockmarkets in the rest of Europe also recovered after Wall Street went up, with Germany's Dax rising 38.97 points to 4334.64, a 0.9% increase. France's CAC clawed back some losses but was still down 126.44 points at 3067.35, a fall of nearly 4%.

Banks Standard Chartered and HSBC were hit today on fears that emerging markets are becoming the latest victims of the ongoing crisis. Standard Chartered was the biggest loser on the FTSE 100, falling by more than 10%. HSBC was down more than 10% in early trading and closed at 663p, 4.7% lower. Mining companies also suffered sharp falls.

On the currency markets, sterling fell almost six cents against the dollar to $1.5299 at one stage, close to the six-year low set last Friday when official data showed the economy shrinking much faster than expected. This heightened expectations of further interest rate cuts from the Bank of England in an attempt to stimulate the economy.

The dollar and the yen rallied as investors shunned risky investments and sought shelter in those currencies.

Experts are ruling out a sustained stockmarket rally before 2009. Asian markets saw another day of panic selling, with Japanese stocks hitting a 26-year low.

On Friday, the FTSE 100 crashed by 9% at one stage, closing 5% lower.

It remains to be seen whether today's rally on Wall Street is repeated across the rest of the world tomorrow – the 79th anniversary of the Black Monday crash on Wall Street.

"Confidence is at zero level and sentiment is on its knees," said David Buik of BGC Partners. "To look for a rally in stockmarkets would be unrealistic before Christmas. However, to have some stability for two or three days without the market falling out of bed would be a huge help."

Jeremy Batstone-Carr, of stockbroking firm Charles Stanley, warned that some companies had still not fully recognised how the global slowdown would hit them. "A western recession is morphing into a global recession. On a corporate level, companies are now waking up to the fact that this could be a pretty prolonged period of recession," he said.

The US Federal Reserve is expected to cut the cost of borrowing later this week, but this did not prevent markets in France and Germany falling sharply this morning.

"If the Federal Reserve cut rates by a quarter point, then it will make absolutely no difference to the markets as it is fully priced in," said Batstone-Carr. "The only way that central banks can make a difference with rate cuts is to go bigger than expected."

Asian crash

As the current crisis sparked by the failure of Lehman Brothers entered a seventh week, Japan's Nikkei index fell 6.4% to its lowest level since 1982, extending its recent slump. It has now lost 20% of its value in the last week.

Hong Kong also saw shares routed, with the Hang Seng index plunging 12% – its biggest daily fall since 1997.

And the Chinese stockmarket tumbled more than 6%, hitting its lowest level since September 2006, bringing more pain to small investors who have watched the Shanghai Composite index fall 70% from last year's peak.

India's stock market fell by 8%. The latest sharp falls, following last week's heavy losses, showed that investors have little confidence that the world's leaders can stave off a painful economic contraction.

In Japan, Canon became the latest blue-chip company to slash its profit forecasts. It blamed the strength of the yen, which has pushed up the cost of its exports overseas.

The soaring yen is such a concern that the G7 group of industrialised nations expressed concern over its "volatility", but this failed to stop the currency strengthening again.

The continuing turmoil in the financial markets has left many smaller countries facing a cash squeeze. The International Monetary Fund is drawing up emergency plans for a new short-term loan facility to help these economies, and Ukraine and Hungary both accepted loans from the IMF yesterday.

And in Belgium, bank KBC received a €3.5bn (£2.8bn) government bail-out after its share price collapsed. Before today, KBC was the only Belgian bank to have resisted state help.