Share prices in Europe and around the world have recorded gains following the US government's decision to bail out the country's two biggest mortgage providers in the US.

In London, the FTSE 100 index jumped 3.9%, despite computer problems that prevented trade for much of the day.

In Paris, the CAC 40 index was up 3.4% and in Frankfurt the DAX jumped over 2% to end at 6,264. Earlier today stocks in China, Japan and elsewhere in Asia were up almost 4%.

It is hoped the takeover of Fannie Mae and Freddie Mac will end months of uncertainty in financial markets.

The move offers hope for an easing of the credit crunch - as the two firms account for half of US mortgage lending. But it also added $5.4 trillion in potential liabilities to the US Treasury - equivalent to the entire federal debt.

US President George W Bush said Freddie Mac and Fannie Mae had posed an unacceptable risk to the US economy. He said this was why the government-sponsored enterprises were totally taken over by the US government.

The two companies have lost billions of dollars during the housing crash. The federal takeover, announced yesterday by the US Treasury Secretary Henry Paulson, is one of the biggest bail-outs in US history.

Mr Paulson said that Fannie Mae and Freddie Mac are so large and interwoven in the US financial system that a failure of either of them would create great turmoil in financial markets in the US and around the globe.

Other banks are exposed to their debt, and because the international financial markets are so weak it had become dangerous for doubts to persist about whether the two corporations were viable.

The deal essentially means that any debt issued by Fannie and Freddie will be backed by the US government.