Fed ramps up year-end loans

WASHINGTON (Reuters) - The U.S. Federal Reserve offered $900 billion in end-of-year lending on Monday as banks hoarded cash, and calls intensified for a coordinated global response to the credit crisis.

Central banks from Kuwait to Canada pumped cash into the banking system as lending dried up, evidence that the year-long financial market turmoil was rapidly spreading well beyond its U.S. roots.

U.S. stocks took a pounding on growing concern that neither the Federal Reserve's efforts nor a $700 billion bailout would be enough to thwart a painful recession. The Dow Jones industrial average .DJI dropped more than 4 percent.

The White House said it was watching the economic situation closely in both the United States and the world, and U.S. finance officials were working with their counterparts overseas to ease credit strains.

The U.S. central bank expanded the amount of money offered in its 28-day and 84-day Term Auction Facility -- or TAF -- auctions to $150 billion each, and increased the amount to be offered in two forward TAF auctions in November to $150 billion each to try to ease end-of-year funding strains.

In all, the Fed said $900 billion in TAF credit would be available for year-end needs.

The U.S. central bank also said it would begin paying interest on the reserves banks held at the Fed. The move was authorized by Congress as part of the $700 billion financial bailout and it allows the Fed to keep flooding markets with cash without driving its benchmark federal funds rate below target.

In Europe, the Bank of England and the European Central Bank combined injected $60 billion of overnight funds into the system, and demand outstripped the supply.

A slight fall in London interbank offered rates for three-month dollars on Monday provided a faint glimmer of hope that money market strains might be easing, but conditions remained poor and lending virtually non-existent across all maturities.

"There are clear signs of top-rated industrial companies no longer having access to credit markets. There is a complete loss of trust in counterparty," strategists at Credit Suisse wrote in a note on Monday.

"We need a systematic, not an ad hoc, approach in Europe. We need immediately to take at least half a percentage point off rates and to see the yield curve steepen. The crisis is as much European as U.S.," they added.

CALLS FOR COORDINATION

The U.S. bailout package signed into law on Friday failed to quiet investors' concerns that the U.S. financial system and the broader economy have been badly weakened by a year-long credit crisis.

A series of bank rescues in Europe over the weekend added to worries that the problems were quickly spreading and sparked calls for stronger international cooperation to stem the contagion.

The President's Working Group on Financial Markets, a committee of top financial regulators that President George W. Bush convened to address the crisis, said market conditions were extremely strained.

The complexity of the crisis meant policy-makers needed to use all tools available "in forceful and coordinated ways across regulatory and supervisory agencies in the United States and throughout the world," the group said.

"This will involve moving with substantial force on a number of fronts," it added.

What that might entail was unclear, but the next step may be to set up a lending program aimed at the term unsecured funding markets, where banks normally lend to each other. That lending has nearly ground to a halt in recent weeks because banks have grown increasingly wary of lending to one another.

The Fed and Treasury said they were working with market participants on "ways to provide additional support" to the interbank lending market.

Former Fed Chairman Paul Volcker echoed the call for global cooperation, saying the crisis presents "not a uniquely American question but a worldwide question.

European leaders pledged to "take all the necessary measures to ensure the stability of the financial system," French President Nicolas Sarkozy said.

Over the weekend, leaders of Europe's four-biggest economies -- Germany, France, Britain and Italy -- decided against a coordinated bank bailout, while vowing to stabilize markets.

Germany offered on Sunday a blanket bank deposit guarantee as it clinched a deal to rescue lender Hypo Real Estate HRGX.DE, while officials across the globe scrambled to contain the fallout from the deepest financial crisis since the 1930s.

In Asia, the Bank of Japan said on Monday it offered to lend 1 trillion yen ($9.9 billion) against pooled collateral in an auction to inject liquidity into the market.

(Additional reporting by Jamie McGeever in London and John Parry and Burton Frierson in New York; Writing by Emily Kaiser; Editing by Tom Hals)