TOPWRAP 2-Fed set to halve rates; Japan, China may act too

* Fed expected to halve rates, signal unorthodox steps

* Bank of Japan seen pumping money, China rate cut flagged

* Goldman quarterly loss expected

* Tokyo shares fall, exporters hit by weaker dollar (For full crisis coverage, double click on [nCRISIS])

By Alister Bull and Leika Kihara

WASHINGTON/TOKYO, Dec 16 (Reuters) - The U.S. Fed looks set to halve interest rates on Tuesday and bring them closer to zero, while Japan and China signalled they were ready to act again in a global drive to contain the worst financial crisis in 80 years.

Central bankers return to centre stage in an action packed week that started on a sour note with a rescue plan for U.S. carmakers stuck in limbo, reverberations of an alleged multibillion financial fraud and a collapse in Japanese business sentiment.

Still to come are results from Goldman Sachs (GS.N), which may report on Tuesday its first quarterly loss as a publicly traded company, a Bank of Japan policy meeting and a possible White House announcement of the auto industry bailout.

The Federal Reserve is expected to cut its benchmark rate by at least half a point to 0.5 percent, its lowest in more than half a century, and to promise to dip into its toolbox for less conventional instruments to pull the world's biggest economy out of recession. [ID:nLF131988]

In Japan, where rates are already at an ultra-low 0.3 percent and the world's second-biggest economy could be heading for its longest ever slump, the finance minister urged the central bank to also take unorthodox steps to ease a funding crunch plaguing Japanese companies.

Bank of Japan holds its policy meeting on Thursday and Friday and analysts are debating whether the biggest plunge in business confidence in three decades reported this week will prompt it to cut rates again after a 0.2 percentage point cut in October.

Governor Masaaki Shirakawa on Tuesday appeared to keep the door open to more easing, telling lawmakers economic conditions grew increasingly severe and pledging "appropriate actions."

"The last time the world economy was in severe conditions was 1929 and the years that followed. Things are not completely the same today, but we can say it is in the severest conditions

since then," he told lawmakers.

The governor also said he was studying possible effects of so-called quantitative easing, a policy of flooding banks with zero interest money, which Japan adopted early this decade to spur lending and jump- start a stagnant economy. [ID:nT140538]

Asian shares clawed back early losses, but Tokyo stocks .N225 lost 1.1 percent with the weakening of the dollar in anticipation of the Fed cut and subsequent yen strengthening hurting Japanese exporters such as Honda Motor. (7267.T)

"While an additional rate cut by the Fed is widely expected, market reaction to the cut is still very much uncertain, as another cut means the Fed is left with one less card to offer," said Lim Tae-gun, an analyst at Daewoo Securities in Seoul.

European stock markets were expected to open a touch higher in cautious trade ahead of the Fed decision, due to be announced around 1915 GMT.

STRAINS

The severity of the global downturn set off by a U.S. sub-prime mortgage market meltdown last year surprised policymakers, who have been running out of options after slashing rates to historic lows and rushing out massive stimulus plans.

Economists now expect the Federal Reserve to acknowledge it will have to resort to direct purchases of government and mortgage-related debt and possibly massive Japanese-style money injections.

In Japan, media reported that the central bank was considering buying commercial paper directly from companies to ease their financing strains.

Among the world's top economies only China has avoided recession, but it risks a sharp slowdown that may feel like one, and its authorities are scrambling to secure a soft landing with massive government spending and aggressive interest rate cuts.

Central bank governor Zhou Xiaochuan on Tuesday left the door open to more easing after China slashed its rates by more than a full percentage point last month, saying it would depend on inflation in the months ahead. [ID:nHKG176526]

China's one-year lending rate stands at 5.58 percent.

The International Monetary Fund said on Monday Chinese growth could almost halve next year to between 5 and 6 percent, well below the 8 percent rate widely regarded as needed to provide jobs for millions of migrant workers and avoid social unrest.

Data pointing to a cooling of red-hot capital spending growth, rounded off on Tuesday a batch of statistics that confimed the world's fourth-largest economy and its main growth engine was rapidly losing steam.

CAR MAKERS STRUGGLE

In rare good news, U.S. lawmakers and other sources told Reuters that the Bush administration could announce a new bailout plan for Detroit's "Big Three" carmakers as early as on Wednesday after the original $14 billion rescue got killed in the Senate on Friday. [ID:nN15511051]

Investors fear that the domino effect of the collapse of U.S. carmakers would hit companies all along the supply chain, wiping out millions of jobs around the world and dealing another body blow to the struggling industry.

In yet another sign of bad tidings for the sector, Japan's Toyota Motor Corp (7203.T), the world's biggest auto maker, on Tuesday suspended a project with truck maker Isuzu Motors (7202.T) to develop diesel engines. The news followed its announcement on Monday that it was putting on hold indefinitely work on a new plant in the United States.

There was no reprieve for banks either.

The industry, whose heavy losses from toxic U.S. housing debt set off the spiral of financial turmoil that escalated into a full-blown global economic downturn, made headlines again due to several banks' exposure to an alleged $50 billion pyramid investment fraud by Wall Street financier Bernard Madoff.

Among those affected were Britain's HSBC Holdings Plc (HSBA.L), Royal Bank of Scotland (RBS.L) and Man Group (EMG.L), Japan's Nomura Holdings (8604.T) and France's Natixis SA (CNAT.PA). (Reporting by Reuters bureaus worldwide; Writing by Tomasz Janowski; Editing by Neil Fullick)