Stock markets in Europe and Asia rose strongly today on mounting evidence that government attempts to shore up the world's battered financial system were beginning to work.

The gains on Europe's markets came in the wake of a record 14.15% gain for Japan's Nikkei index.

In London, the FTSE 100 rose 6% despite news that inflation in Britain was at a 16-year high.

Germany's DAX was up 5.1% even though a group of leading German economic think tanks said Tuesday that Europe's largest economy is on the "brink of a recession". The CAC-40 in France was 5.6% up.

Wall Street fluctuated but largely extended its big advance from yesterday as investors reacted enthusiastically to the US government's plans to spend 250 billion dollars buying stock in private banks.

US President George Bush the infusion of billions of dollars into the American banking sector was part of a systematic global strategy to calm markets and ensure "growth and prosperity."

"Nations around the world are working together to overcome this challenge, and with confidence and determination, we will return our economies to the path of growth and prosperity," he said.

The exception was Iceland whose stock exchange plummeted almost 70% when trading resumed today after being suspended since Friday after the government took control of the country's three major banks. It later rose to a loss of only 5%.

Iceland has been hit particularly hard by the global credit squeeze because of its heavyweight banking sector.

Its troubles are also having repercussions in Britain and elsewhere in Europe where tens of thousands of private savers and institutions have accounts worth millions of pounds with branches or subsidiaries of those banks.

The overall resurgence followed yesterday's announcement by European governments of 1.7 trillion euros in national packages to save ailing banks, and the confirmation that the US would follow suit.

Earlier, Asian governments took more steps to fortify their own financial systems, helping stock markets across the region to rally. Authorities relaxed regulations on companies buying up their own shares, a change that will help prevent takeovers and allow companies to prevent a nose-dive in their own issues.

Japan also promised to continue to protect people's insurance policies and savings accounts, and said it will consider capital injection into medium-size and small Japanese financial institutions.

And in Australia, the government announced a plan to inject 10.4 billion Australian dollars (£25 billion) to strengthen the country's economy, helping send the S&P/ASX200 index 3.7% higher.

Hong Kong promised to guarantee all bank deposits until 2010 and its key index ended up 3.2%, while South Korea's market jumped over 6%. The Philippine market surged more than 7% and Indonesia's market - shut half of last week due to dramatic declines - was up more than 6%.

Only China's market fell - sliding 2.7%.

Russia's stock markets joined the surge, prompting regulators to suspend trading on one of the two major exchanges.