Mervyn King has agreed to continue "close dialogue" with high street banks in a bid to calm market volatility and ease the credit crunch.

Mervyn King to continue talks

The Bank of England chief's announcement came after he met representatives of the UK banking industry.

The banks demanded action to calm the marketsand wanted assurances that the BoE will provide extra financial help should it be needed.

"The Bank of England and the banks agreed to continue their close dialogue with the objective of restoring more orderly market conditions," the BoE said in a statement.

The FTSE 100 closed down 50.4 points at 5495.2 before the announcement was made.

Earlier the BoE made another £5bn available to lenders, taking the total on offer at its weekly cash auction.to £11bn.

The meeting came after another volatile day on the stock market that saw the share price of one leading bank fall by 20% at one stage.

It happened amid claims of traders spreading false rumours and dealing off the back of them.

The BoE took the unprecedented step of denying reports that Halifax Bank of Scotland (HBOS) had turned to it for emergency funding.

A spokesman for the Bank said the meeting was scheduled last week and was not in response to any specific event.

He described it as part of a "regular exchange of views" between the central bank and the big five high street banks.

These are HBOS, HSBC, Royal Bank of Scotland, Barclays and Lloyds TSB.

The Financial Services Authority has meanwhile launched an inquiry into alleged market abuse following Wednesday's activities.

A spokesman said it would "not tolerate market participants taking advantage of the current market conditions to commit abuse".

HBOS closed 7% down in London despite branding the rumours about it as "malicious" and "lies".