The Bank of England has dramatically slashed interest rates by 0.5% along with central banks around the world in response to the global financial turmoil.
The snap decision by the Bank - a day earlier than expected - came as the Treasury announced a £50 billion bail-out of the banking system.
The Bank's half-point cut is the first such move since the aftermath of the 9/11 terror attacks in November 2001.
The Bank is acting to cut rates alongside the European Central Bank, the US Federal Reserve and central banks in Canada, Sweden and Switzerland.
Policymakers said inflation fears had diminished while the "recent intensification" of the financial crisis has "augmented the downside risks to growth" - Bank-speak for recession worries.
Its statement warned: "Data released over the past month indicate that the outlook for economic activity in the United Kingdom has deteriorated substantially."
But the move provided an instant shot in the arm for retailers who have been punished by the squeeze on consumer spending.
Shares in high street giant Marks & Spencer - one of the biggest victims of the slowdown - soared more than 7%, while Next rose 5%.
Halifax Bank of Scotland, already buoyed by the Government rescue, saw shares leap 62% after a 42% fall on Tuesday on hopes the Bank's sudden move could kick-start a housing recovery.
In the FTSE 250 housebuilder Taylor Wimpey rose 27%.
