By Daisy Ku and Dominic Lau

The problem occurred as markets rebounded worldwide following the U.S. government's decision to bail out mortgage companies Fannie Mae and Freddie Mac .

"It's awful. On a day when the eyes of the world are watching all the financial markets, for us not able to trade it's appalling," one trader said.

"We have the biggest takeover in the history of the known world in the Freddie Mac stuff and then we can't trade. It's terrible."

The Johannesburg Stock Exchange, which uses the LSE's trading platform TradElect, also suspended trading. TradElect was introduced by the LSE in June 2007. A previous systems outage occurred in November that year, but lasted less than one hour.

"This halt today clearly has once again damaged (LSE's) reputation as a leading exchange especially on a day like today, highlighting that it may have been unable to handle the volumes this morning," another trader said.

The exchange would not say whether volume was the issue, and declined to give details on what had caused the problem.

The LSE, the world number-three exchange by traded volume in the first half of this year, opened for trading as usual at 0700 GMT, but connectivity problems left some brokers unable to trade, so it was forced to suspend trading soon after to ensure market players were not disadvantaged.

In an afternoon update on the situation, it said that reconnecting customers was "taking longer than expected." It finally got trading going at 1500 GMT -- half an hour before the exchange was due to close.

The UK Financial Services Authority, in its Financial Risk Outlook 2008 report, says the risk of such infrastructure failures is growing with the rise of electronic trading and straight-through processing.

SYSTEMS UPGRADES

The LSE plans a series of system upgrades and is migrating Italian equities to its trading platform TradElect this month.

On June 17, the Milan Stock Exchange, which the LSE acquired in October 2007, suspended trading due to technical difficulties. Last year, on November 7, the LSE itself experienced a connectivity problem with its real-time market data system Infolect which connects to TradElect.

The November incident was the exchange's first serious systems problem in seven years and did not last more than an hour.

Monday's trading suspension was the longest suffered by the exchange since April 5, 2000, when problems with an older trading system led to an eight-hour trading suspension.

The trading failure came as the LSE faces increasing competition from rivals and new entrants.

Nasdaq OMX Europe announced it has been granted approval by UK's Financial Services Authority to operate as a Multilateral Trading Facility (MTF).

The cash equity platform, set up by transatlantic exchange group Nasdaq OMX to rival European bourses such as LSE and Deutsche Boerse , will start on September 26 to trade 25 of the FTSE 100 blue chips, followed by a rollout of 600 stocks by the end of October.

The LSE faces growing competition from new entrants to the sector and its share price has fallen sharply as a result this year.

Turquoise, a cash equities trading venue backed by nine investment banks and Chi-X Europe, owned by Nomura <8604.T> and investment banks are both gaining market shares. Both said on Monday that they were trading normally.

The LSE outage coincided with a system failure at the Intercontinental Exchange (ICE), which shut trade across London commodity markets for more than an hour on Monday. According to an ICE official there was no apparent link between the two.

(Additional reporting by Simon Falush; Editing by Andrew Callus/Rory Channing)