European and North American central banks on Wednesday unleashed a co-ordinated attempt to end the credit squeeze in global financial markets, setting off a wild day of trading as investors tried to make sense of a barrage of measures to increase market liquidity.

The Federal Reserve, European Central Bank, Bank of England, Bank of Canada and the Swiss National Bank all announced steps to make cash more readily available to banks. The Bank of Japan and Reserve Bank of Australia voiced support.

The actions – described by the Bank of England as an attempt to “demonstrate that central banks are working together to try to forestall any prospective sharp tightening of credit conditions” – helped ease pressure in money markets, a vital area of concern for policymakers. One-month Libor – the rate at which banks borrow from each other – was expected to set at 4.99 per cent on Thursday, down from 5.10 per cent on Wednesday.

However, conditions in the money markets remained strained by normal standards. Stocks also gave back most of their gains after surging earlier in response to the announcements.

The Fed said it was forming a new credit auction facility – first revealed by the Financial Times – that will offer cash to banks in return for a wide range of collateral, including housing-related securities. The Fed said it would hold two auctions of $20bn each in one-month loans this month.

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The ECB and the Swiss National Bank said they had entered into so-called swap arrangements with the Fed to auction $24bn in dollar funds to banks in Europe. The two initiatives effectively form a new onshore and a new offshore dollar liquidity facility, and the Fed is willing to consider increasing both if required.

However, this is not all net new money, as the Fed is likely to pare back the amount of liquidity it would have provided through open market operations.

The Bank of England and the Bank of Canada, meanwhile, announced sweeping changes to their collateral rules to allow banks to pledge a much wider range of securities in exchange for funds.

Lucas Papademos, vice-president of the ECB, said the actions were “aimed at easing pressures and containing pressures in the term money market”.

Analysts hailed the announcements as evidence of the world’s top central bankers working together, but some traders were angry at the Fed for failing to signal the decision after its Tuesday policy meeting.

A senior Fed official said: “This was a global effort...We could not have announced yesterday as Europe was closed.” He said the announcements had “nothing to do” with the negative reaction to the Tuesday rate cut.

The S&P 500 opened more than 2 per cent higher, but dipped into negative territory as oil prices surged and ended up 0.6 per cent. Yields on two-year Treasuries rose 21 basis points to 3.13 per cent. However, interest rates for shorter-dated Treasuries barely moved – a sign of continued risk aversion.

Reporting by Krishna Guha in Washington, Chris Giles and Gillian Tett in London, Ralph Atkins and Ivar Simensen in Frankfurt and Michael Mackenzie in NewYork