As the shockwave from the US financial meltdown hit Europe yesterday, governments scrambled to shore up fragile banks and restore confidence to flighty stock markets.

In Paris, President Nicolas Sarkozy held a 5am emergency meeting of his top economic team as France, Belgium and Luxembourg agreed to inject 6.4 billion euros ($11.5 billion) into the beleaguered bank Dexia.

"Our ambition was to have very strong political involvement in order to send a signal to the markets,'' Belgian Prime Minister Yves Leterme told journalists in Brussels after the deal was reached.

Despite their intervention, the failure of US lawmakers to agree on a cash bail-out plan for failing banks panicked Europe's markets, in the wake of a rout across Asian markets and on Wall Street overnight.

Leading markets across Europe were down in early trade, but regained some confidence in the afternoon after Wall Street started rising.

In London, the FTSE 100 index of leading shares finished with a gain of 1.7% to 4902.45 points, the Paris CAC 40 rose 2% to 4032.10 points and Frankfurt's DAX added 0.4% to 5,831.02 points.

Outside the European Union, the Russian government suspended trading on its two main markets, the RTS and the MICEX, a day after they fell 7.11% and 5.50% respectively.
 
"Investors everywhere are suffering an almost complete loss of confidence in governments' ability to prevent a systemic failure of the financial system,'' Moscow-based analyst Chris Weafer wrote in a note before trading was to start.

The action in Paris and Brussels was designed to shore up confidence.

After a long night of negotiations, Belgium and France agreed to pump 3 billion euros each into Dexia, and Luxembourg will invest 376 million through a convertible loan, one day after the bank's shares fell 30%.
 
On Sunday, the governments of Belgium, The Netherlands and Luxembourg part-nationalised a leading Belgian bank, Fortis, injecting 11.2 billion euros.
 
"The French banking system is better protected than the others, but the situation has changed,'' a senior official in Sarkozy's office said. "Banks are in trouble in Germany, Belgium and Great Britain. We feel a bit surrounded.''

Following his pre-dawn crisis meeting with Prime Minister Francois Fillon and Finance Minister Christine Lagarde, Sarkozy was to hold talks with France's leading bankers in order to identify other weak links in the sector.

The French leader promised in a speech last week that no French depositor will lose so much as a euro in savings, and gave an undertaking that the state would rescue failing institutions.

"The purpose of this meeting is to take stock of the situation. Since we've promised to intervene, we might as well find out where we'll have to act,'' the presidential official said, speaking on condition of anonymity.

Dexia's shares were suspended from trading in Paris and Brussels at the request of regulators, but already another French bank looked vulnerable.
Natixis shares lost 30% in trading yesterday and another 8% when the Paris market opened today, leaving it trading at just over 2 euros, two years after it joined the exchange at more than 19 euros.

Ireland, the only country in the euro-zone single-currency block to have officially entered a recession, also issued a guarantee. The finance ministry promised to protect savers' deposits in six major banks for two years.

The move came after a record share slump in Dublin yesterday which saw the Irish Stock Exchange Index fall 13%.

Yesterday, the main ISEQ stock market index closed up 7.4%, buoyed notably by a 63% rise in Anglo-Irish Bank shares.

AFP