The Group of Seven leading industrial nations have backed a scheme to protect well-run emerging market economies from potential financial crises.

The agreement on the US plan for precautionary credit lines is designed to prevent financial turbulence spreading from country to country in a "contagion" process.

The plan, which lifted stock markets and strengthened the dollar, forms part of a wide-ranging statement by finance ministers and central bank governors on reforms to strengthen the global financial system.

Brokered by Mr Gordon Brown, Chancellor of the British Exchequer and chairman of the G7 finance ministers, it follows months of turmoil that has swept the world economy.

"We must do more to build a modern framework for the global markets of the 21st century and to limit the swings of boom and bust that destroy hope and diminish wealth," said the G7 heads of government.

Analysts noted that the G7's statement was issued as officials from Brazil flew to Washington to discuss a rescue package worth over $30 billion (£20 billion) with the International Monetary Fund.

The statement reaffirmed G7's commitment "to create and sustain the conditions for strong, domestic demand-led growth", suggesting that the door remained open for further interest rate cuts in the industrial countries.

Agreement on the US credit line proposal is a step forward from the IMF's annual meeting a month ago, where German reluctance meant G7 could only agree to "explore" the idea.

"The central element would be the establishment of an enhanced IMF facility which would provide a contingent short-term line of credit for countries pursuing strong IMF-approved policies," the G7 said.

US President Bill Clinton said: "This line of credit gives us a powerful new tool that can be used when it will do the most good, at the lowest cost, before the trouble starts."

Officials said loans available under the facility were likely to have short maturities and an interest rate at least 300 to 500 basis points above the IMF's standard lending rate. The G7 said it would be accompanied by "appropriate private sector involvement", namely agreement to roll over debts.

IMF lending could be accompanied by credit lines from individual governments. "It would remain up to individual G7 governments and other governments concerned to decide in each case whether to provide such bilateral financing."

The IMF will find it easier to pay for such a facility now that the US Congress has paved the way for an increase in its capital base and credit lines from industrial countries. These give it access to an extra $90 billion in lendable resources.

The IMF yesterday agreed to conditions set by the US Congress when it passed an $18 billion quota contribution last week. It will now include in its programmes for debtor countries requirements that they liberalise trade, eliminate subsidies and treat foreign debtors the same as domestic debtors.

To promote crisis prevention, the G7 agreed to comply with IMF codes of conduct on monetary and fiscal policy, as well as to provide information on their public sector foreign exchange positions.