NEW YORK (Reuters) — Governments around the world bet hundreds of billions of dollars to rescue failing banks yesterday, sending world stocks soaring and giving Wall Street its biggest one-day gain ever.

The US government is set to buy $250 billion in equity stakes in banks, a source briefed on the situation said, after Britain, Germany, France and other European countries pledged more than 1 trillion euros ($1.36 trillion) for bank guarantees and equity stakes.

US regulators will announce details of the US plan this morning, the Treasury Department said.

The Dow Jones industrial average and the S&P 500 index raced to an 11 percent gain, their biggest ever, after recording their worst week in history last week amid panic over collapsing banks and fears that major economies were headed toward recession.

Stocks worldwide added more than $1.7 trillion in value yesterday, based on a record 9.3 percent gain in the MSCI world equity index.

"Sometime last week it seemed like we faced Armageddon, so to have a coordinated plan on stabilising banks is huge progress," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

US Treasury Secretary Henry Paulson met with top Wall Street bankers, agreeing to spend $250 billion on equity stakes and a three-year guarantee of bank-to-bank lending, the source said.

This was an about-face from a previous US focus on buying bad debt from banks, after world finance ministers coalesced around a British proposal at weekend meetings in Washington.

Wall Street also focused yesterday on investment bank Morgan Stanley, which reached a financing deal with Mitsubishi UFJ Financial Group Inc (MUFG), possibly with US government support. Morgan shares soared 87 percent, after losing 58 percent last week.

And Banco Santander said it would acquire the remaining 75 percent stake in Sovereign Bancorp Inc it does not already own, as the euro zone's biggest bank hunted for bargains in the beaten-down financial sector.

In addition to the bank bailouts, the US Federal Reserve, the European Central Bank, the Bank of England and the Swiss National Bank said they would lend commercial banks as much US dollar liquidity they needed.

That had an instant impact on bank-to-bank lending rates, which eased, but there was still no clear evidence of funds cascading from banks to companies.

US bond markets were closed for the Columbus Day holiday.

The euro and sterling gained strength on the European plans.

Oil rose more than $4 to $82 a barrel.

British Prime Minister Gordon Brown called on world leaders to create a new financial architecture to replace the current system, which was set up at a conference in Bretton Woods, New Hampshire, in 1944.

"Sometimes it does take a crisis for people to agree that what is obvious and should have been done years ago can no longer be postponed," Brown said in a speech at the London offices of Thomson Reuters.

Iceland — forced over the past week to take over three big banks, shut down its stock market and abandon attempts to defend its currency — officially requested financing from the International Monetary Fund, an IMF official said.

"I'm slightly less terrified today than I was on Friday," said Princeton University economist Paul Krugman, named as the winner of the Nobel prize in economics on Monday. "We're going to have a recession and perhaps a prolonged one but perhaps not a collapse."

Japan said it was considering whether to guarantee all bank deposits, while the central bank said it might join further global efforts to boost dollar funding to strained money markets.

The two men vying to succeed US President George W. Bush after the November 4 election were formulating their own plans.

Democrat Barack Obama, leading in public opinion polls, proposed a 90-day moratorium on home foreclosures and other measures aimed at creating jobs.

Republican John McCain was also considering rolling out a new economic package.

In Washington, Democratic leaders in the US House of Representatives called for greater regulation of financial markets and a new stimulus plan to stave off recession.