The City watchdog last night took the drastic step of banning the short-selling of financial stocks at the end of a day that saw regulators and central banks fighting back against the storm in global markets.

The US government is considering staging a vast bail-out of the hundreds of billions of dollars of failing mortgages held on the balance sheets of major banks in an attempt to end the credit crisis once and for all.

The bold move, the brainchild of advisers close to US Treasury Secretary Hank Paulson, would be the Bush administration’s most audacious response to date to the crisis, which has consumed financial markets and claimed Lehman Brothers and American International Group as victims.

Earlier, central banks had acted together to offer $180bn of liquidity to banks outside the US that are desperate for dollars. Last night, Treasury Secretary Hank Paulson and Ben Bernanke, chairman of the Federal Reserve, were due to meet congressional leaders to discuss how to develop a structural solution to toxic assets in the financial system, expectations of which boosted equities in the US.

The temporary ban on shorting of financial stocks – a move unprecedented in modern times – was agreed at a meeting at 11 Downing Street between Alistair Darling, chancellor, Mervyn King, Bank of England governor, Sir Callum McCarthy, outgoing Financial Services Authority chairman, and his successor, Lord Turner.

Gordon Brown weighed in, backing a crackdown on 'irresponsible behaviour'. 'We have got to clean up the financial system. We don’t want these problems occurring in the future,' the prime minister said.

Financial Times, Daily Telegraph