President George W Bush has announced that the US government is to buy stakes in the country's largest banks.

In a move expected to cost $250bn (£143bn), the US government is moving to try to return stability to the American banking sector.

Federal authorities will also temporarily insure most new debt issued by American banks.

"This is an essential short-term measure to ensure the viability of America's banking system," he said.

"This is not intended to take over the free market, but to preserve it."

Mr Bush also said that the Federal Reserve would finalise work on a new programme that would make it the buyer of last resort for companies' short-term debt, known as commercial paper.

Further, government insurance is being expanded to cover accounts used by small businesses.

'Restore normality'

The money will come from the $700bn bail-out package approved by US lawmakers earlier this month.

The US plan - effectively part-nationalisation - comes after the bosses of the country's largest banks were summoned to a special meeting at the US Treasury on Monday.

Speaking overnight, US Federal Reserve chairman Ben Bernanke said he was confident the moves would be successful.

"These steps will allow us to restore more normal market functioning and encourage private capital to further support the reinvigoration of financial markets," he said.

Share surges

Anticipation of the US announcement has had a major impact on global shares:

• Japan's main Nikkei index closes Tuesday up 1,171 points or 14% at 9,448, the biggest one-day rise in its history

• The UK's FTSE 100 was up 243 points or 5.7% at 4,500 in early afternoon trading in London.
• Germany's Dax had advanced 274 points or 5.4% at 5,336, while France's Cac had added 187 points or 5.3% at 3,719
• Wall Street's Dow Jones ended Monday up 936 points or 11% at 9,388
• Australian shares advance 431 points or 4%

'Too small'

The US government is expected to buy preference shares in the banks.

Preference shares pay a fixed rate of interest instead of a dividend, which has to be paid before other shareholders receive anything, but they do not carry voting rights.

US taxpayers may even end up making a profit from the shares if the rescue packages work and the banks recover, but that is not guaranteed.

Despite the big rises in global shares, some analysts have questioned whether the US move is bold enough.

"The actual amount [of the plan] is still a little small," said Nagayuki Yamagishi, a strategist at Mitsubishi UFL Securities.

European lead

America's move comes a day after the UK said it would inject up to £37bn of taxpayers cash into British banks Royal Bank of Scotland, Lloyds TSB and HBOS.

And European governments that share the euro are putting aside more than 1 trillion euros to protect banks through guarantees and other emergency measures.

The bulk of the money will be used to guarantee lending between banks.

The cash will also be used to take stakes in ailing banks.