CHINA’S softening stance to its squeezed financial sector helped soothe investors’ nerves yesterday and prevent the FTSE 100 Index sinking below the 6000 barrier.

Concerns over an end to economic stimulus in the US and an unfolding credit crunch in China have combined to derail the London market in recent days, with the FTSE 100 at its lowest level of the year on Monday night.

But with China’s Shanghai index pulling back from an earlier four per cent slump to close 0.2 per cent lower, the FTSE 100 staged a rally of 72.8 points to close at 6101.9.

Shanghai’s stock index has entered bear market territory – a fall of 20 per cent from its recent peak – after the country’s central bank allowed commercial lending rates to spike as high as 13.4 per cent in recent days as part of an effort to curb underground lending and rein in its economic stimulus programme.

China is attempting to rebalance its rapidly-growing economy away from creditfuelled growth and onto a more sustainable path driven by domestic demand – sparking fears this could hurt growth in the powerhouse economy.

But those fears receded yesterday as China’s central bank insisted liquidity was being monitored and remains ample, and it will support lenders that face shortages.

The Dax in Frankfurt and the Cac 40 in Paris were both up about 1.5 per cent.

Outgoing Bank of England governor Sir Mervyn King’s insistence that the UK is not ready to pull the plug on quantitative easing – unlike the US Federal Reserve which plans to start winding up its asset-buying drive – also helped settle UK markets.

But Ishaq Siddiqi, market strategist at ETX Capital, warned there may be worse to come, saying: “Today’s price action in Europe is merely a dead-cat bounce and this rally is likely to lose steam in the coming sessions.”

Mining stocks have played a big part in the recent ten per cent fall in London’s top flight index, although they were higher yesterday as Vedanta Resources improved 20p to 1046p and Rio Tinto lifted 67p to 2649p.

Chip designer Arm Holdings was the among the biggest blue-chip risers – up 27.5p to 786p – after Investec Securities upgraded the stock to buy in light of a recent share price fall.