(Adds closing levels, trader comments)
By Olga Popova and Polina Vorobieva
MOSCOW, Sept 30 (Reuters) - Russian stocks avoided a panic sell-off on Tuesday after authorities took new steps to prevent them from following global indexes and ended the day on positive territory after confidence returned to U.S. markets.
Russia’s financial markets watchdog halted trading for two hours and stepped in to cap volatility on Tuesday morning as Russian indexes were poised to follow Monday’s biggest ever one-day fall in the Dow industrials.
When trade resumed the key indexes RTS .IRTS and MICEX briefly fell by as much as 3.5 and 7 percent.
But they started to recover in the afternoon as investors voiced optimism the U.S. Congress will eventually pass a plan to rescue tainted banking assets, lifting the U.S. dollar and oil, a key indicator for the Russian market dominated by oil firms.
The RTS closed 1.48 percent up and the MICEX was up 0.79 percent.
“The kind of panic where you have to sell everything in a fraction of a second is not in evidence,” said Alexander Lobanov, Prospekt brokerage head of equity sales and trading.
“The regulator moved quickly and it helped... Many market collapses are self-sustaining, but you can stop the chain reaction by suspending trade,” he said.
The RTS index is down more than 50 percent from its May peak and investors had feared a further rout after the U.S. Congress failed to agree a $700 billion bailout for the financial industry.
Other traders also praised Tuesday’s actions by financial authorities and called on the government to take new measures. But they added that the idea of emerging markets’ decoupling from global stocks seemed remote.
“The panic has been stopped... The patient’s death has been postponed. The big question is what’s next because we are not trading on our own, we follow the West,” said Evgeny Volkov, a trader at MDM Bank.
State bank Sberbank led the pack with a gain of 8.68 percent, led by strong banking shares in the United States.
Real estate firm PIK (PIKK.MM) plunged as much as 18 percent after Fitch ratings agency said Russian property developers were likely to be among the worst-hit by a deteriorating financing environment. For a story click on [ID:LU115595]
Liquidity on the Russian stock market has been thinned by a mass exodus of foreign investors from emerging markets in recent months. And it all but disappeared, two weeks ago, when the finance industry was hit by a crisis of confidence.
The crisis was sparked by talk that several large market players had failed to meet obligations on widely employed share repurchase agreements, and widespread selling of shares put up as collateral on the deals.
Uralsib strategist Chris Weafer said: “Globally, investors are running from risk. With the price of crude (WTI) crashing back to the $95-per-barrel level, plus worries about the outlook for stability within the country’s financial system, Russia is firmly in that category.”
Volatility on foreign markets has been mirrored in Russia, and exaggerated by low liquidity. The stock market was suspended for nearly two full sessions in the days after the collapse on Sept. 26.
On Monday, Russia's benchmark share index, the RTS .IRTS, closed down 7.11 percent, well before the U.S. Congress failed to agree a rescue package.
On Tuesday, in addition to suspending trade the markets watchdog also tightened the limits on intraday and day-on-day share price moves in a bid to cap volatility.
It will now suspend all trading, or trading in a particular share, if a share price or a broader index falls more than 10 percent at the open versus the previous close, or by more than 5 percent in the course of the day.
The previous thresholds were 12 percent and 8 percent respectively.
It also had allowed exchanges to extend trading hours by one hour to 1900 local time (1500 GMT), giving local players more time to observe Western market moves. Moscow time is three hours ahead of London and eight hours ahead of New York. (Reporting by Olga Popova and Melissa Akin; Editing by Simon Jessop and Sharon Lindores)