Wath our Face-Off programme: 'Freddie and Fannie, a dangerous precedent?'

Global stocks surged and the dollar soared to a one-year peak initially on Monday in reaction to the U.S. government's seizure of Fannie Mae and Freddie Mac but markets retreated from highs as uncertainty lingered about the prolonged credit crisis.

Equity markets surged worldwide as hopes the U.S. Treasury's plan to take over the companies, which together back about half of the $12 trillion in U.S. home mortgages -- might put a floor under troubled financial markets.

U.S. and euro zone government bond prices fell after the U.S. government's massive step on Sunday to prop up the ailing U.S. housing market and ward off further financial turmoil that Fannie and Freddie pose to markets and the U.S. economy.

Oil prices, meanwhile, edged lower after an early rise as Hurricane Ike churned toward the U.S. oil hub in the Gulf of Mexico and traders awaited a decision this week by the Organization of Petroleum Exporting Countries on its production policy. U.S. light sweet crude oil fell 85 cents to $105.38 a barrel.

The bailout sparked widespread euphoria with regional equity benchmarks in Asia surging more than 4 percent and in Europe more than 3 percent. Shrinking capital bases at Fannie and Freddie had undermined investor sentiment worldwide since its financial assets were widely held by banks and individuals.

But an early flight from safe-haven government bonds and into riskier assets had faded by late New York morning trade. "Good news for financials, but again, it's not a panacea," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

"It definitely draws a line in the sand and should help credit conditions, but we still need the underpinnings of the housing market to show stability or improvement before we can say the credit crisis is behind us," Ablin said.

Semiconductors weighed heavily on tech shares on the view that the sector is still vulnerable to sluggish global growth.

Even though financials were still in positive territory, a drop in plunge of Lehman Brothers took some steam out of the sector, causing the broader market to also pare gains.

U.S. stocks retreated from their powerful open as more investors questioned the benefits to the housing sector and the rest of the economy from the government's bailout.

"There was an initial euphoria. Now you have folks taking half a step back looking at the plan," said Chip Hanlon, president of Delta Global Advisors in Huntington Beach, California.

"This is just delaying the day of reckoning," he added.

Before 1 p.m., the Dow Jones industrial average was up 161.62 points, or 1.44 percent, at 11,381.93, after jumped more than 300 points in early trading.

The Standard & Poor's 500 Index was up 13.13 points, or 1.06 percent, at 1,255.44. The Nasdaq Composite Index gained slightly 0.12 points, or 0.01 percent, at 2,256.00, after slipping into negative territory.

Shares of financial services companies, including banks, led gainers. Bank of America was up more than 7 percent while JPMorgan Chase climbed more than 5 percent. The stocks were among the top boosts to both the Dow and the S&P 500. The S&P financial index rose more than 4 percent.

Shares of investment bank Lehman Brothers plunged following news that its executives were meeting with potential buyers for the bank's Neuberger Berman asset management arm. Investors worried Lehman may be forced to sell the unit at a fire-sale price.

Analysts initially viewed the U.S. Treasury bailout as a positive step in staving off wider financial and housing market weakness, which helped bolster the dollar.

"On balance, the takeover of Fannie and Freddie is a net positive for the U.S. dollar because it shores up confidence in the U.S. financial sector," said Omer Esiner, a senior market analyst, at Ruesch International on Washington.

"Having said that, I don't think the government action represents a silver bullet for all the problems facing the housing market and the economy.

In Europe, the FTSEurofirst 300 stock index gained 4 percent with the DJ STOXX bank index up 8 percent.

But the equity rally fizzled as investors began to come to the conclusion that while the U.S. move will provide short-term relief for the U.S. housing and global financial markets, it isn't a silver bullet.

"It will reduce the amount of stress, of course, and is a necessary condition for stabilisation. But not a sufficient condition," said Gianluca Salford, fixed income strategist at JP Morgan.

"In terms of broad market sentiment, I don't expect this to be a sea-changing event," he said.

OPEC ministers gathering in Vienna were expected to leave formal production targets unchanged as Ike threatened U.S. offshore oil installations still recovering from Hurricane Gustav last week.

U.S. Treasury debt prices were mixed. The benchmark 10-year U.S. Treasury note fell 5/32 to yield 3.73 percent. The 30-year U.S. Treasury bond rose 2/32 to yield 4.31 percent.

Gold swung back and forth, twice rising 2 percent before partially relinquishing the gains, tracking moves in the dollar and oil prices.

Spot gold prices fell $3.50 to $799.30.

The dollar rose against major currencies, with the U.S. Dollar Index up 1.29 percent at 79.525. Against the yen, the dollar was up 0.29 percent at 108.05.

The euro fell 0.97 percent at $1.4129.

Asian stocks surged 4 percent on Washington's bailout, spurring investors to buy risky assets and sell safe havens such as government bonds.

Japan's Nikkei share average rose 3.4 percent, bouncing from a 5-1/2-month low on Friday, and Hong Kong's Hang Seng index surged 3.9 percent, led by shares of Europe's largest lender, HSBC Holdings.

The MSCI index of Asia-Pacific stocks outside of Japan soared 5.2 percent, rebounding from an almost two-year low, in the biggest daily gain since August 2007.