Emergency help for financial markets entered new territory on Monday as the European Central Bank announced it would on Tuesday offer unlimited funds at below market interest rates in a special operation to head off a year-end liquidity crisis.

The surprise move, which follows last week’s co-ordinated barrage of measures by the world’s central banks to increase market liquidity, suggests the ECB is still frustrated at the failure to ease financial market tensions.

It came as the Federal Reserve held the first of its new credit auctions, offering to lend $20bn to banks, with another $20bn to come before the year-end. Credit markets were little moved, with low volumes in the bond market as dealers awaited results of the auction, due on Wednesday.

Global equities sank lower and the dollar gained ground against the euro with an improvement in US capital flows data and bigger-than-expected reduction in the current account deficit.

President George W. Bush warned “it will take a while to get through the housing bubble” but reassured Americans “we have got a strategy”. Meanwhile, Hank Paulson, Treasury secretary, dismissed an argument from Alan Greenspan, former Fed chairman, that it would be better to provide cash aid to homeowners than freeze rates on subprime loans. “I don’t think what we need is a big government bail-out,” he told Fox Business Network.

The ECB move was reminiscent of its operation on August 9, during the earlier stages of the credit squeeze. But that was only for overnight loans while the new offer is for two weeks.

“This is basically Father Christmas to those who have access,” said Erik Nielsen, economist at Goldman Sachs. “They are bailing out people who have not really adjusted their balance sheets to the new reality.” But Julian Callow, economist at Barclays Capital in London, said the ECB was “simply doing their job at being lender of last resort”.

The ECB had announced that Tuesday’s weekly money market operation would mature on January 4 – covering the year-end. But on Monday night it said it would satisfy all bids offering 4.21 per cent or more. Prior to the announcement, the cost of borrowing two-week money hit 4.9 per cent but it fell sharply afterwards as the ECB move in effect put a cap on market interest rate.

The ECB said the move was “fully consistent” with its aim of keeping interest rates close to its main policy rate of 4 per cent.

The latest move underlines the limited impact of last week’s co-ordinated central bank intervention and highlights continued operational differences between the ECB and the more incremental Fed and Bank of England.

A report by the Bank for International Settlements on Monday revealed the striking variation in money market operations used by central banks.

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