Pressure on G7 after muted response to rate cuts

LONDON (Reuters) - Finance ministers from the world's top economies faced calls on Thursday for united action after an emergency round of interest rate cuts and government support for ailing banks won only muted market support.

The United States signaled it could consider buying into banks to help get frozen funds flowing again and governments in Europe moved to try to restore confidence in financial firms hit by the worst crisis since the 1930s.

South Korea, Hong Kong and Taiwan lowered their interest rates after coordinated cuts on Wednesday from major central banks including the Federal Reserve.

The measures were designed to contain the market meltdown that has destroyed lenders from Wall Street to Iceland and left people worried about the security of their savings and jobs.

Attention was turning to a meeting in Washington on Friday of finance ministers from the Group of Seven wealthy nations.

Investors want politicians from the G7 and European Union to show they can cooperate more effectively rather than rely on piecemeal national initiatives.

British Prime Minister Gordon Brown has urged the G7 and EU to guarantee lending between banks, in line with measures Britain has introduced domestically.

However, EU states remained divided over the need to set up a financial supervisor with responsibility across Europe.

European Commission President Jose Manuel Barroso also said he was not satisfied by the level of cooperation among the bloc's 27 members.

Markets were mixed. Japan's Nikkei dipped to its lowest close in more than five years after a volatile day. European stocks traded around one percent higher after falling to near five-year lows on Wednesday despite the emergency rate cuts.

"The rate cuts are a good step in the right direction to stop the bleeding, but this won't be enough. European governments have to act swiftly and decisively together," said Rik Zwaneveld, trader at AFS Brokers, in Amsterdam.

RECESSION FEARS

U.S. shares were expected to open higher, breaking a six-day losing streak in which they have shed almost 15 percent.

U.S. markets face additional uncertainty after a ban on short-selling of financial stocks expired at midnight on Wednesday. Short-sellers bet on falling stock prices and had been blamed for driving share prices lower.

There was little sign the rate cuts had unlocked money markets.

Three-month borrowing on interbank markets remained expensive near this week's highs across all currencies, and lending beyond a week or two remained frozen, traders said.

The emergency rate cuts underlined the grim economic outlook.

The International Monetary Fund said the world was set for a major downturn in the face of the worst financial crisis since the Great Depression.

Japan was considering further measures to stimulate the world's second largest economy after a dive in machinery orders provided evidence that the financial crisis was driving it toward recession.

BOLSTERING BANKS

The crisis stems from the collapse of the U.S. housing market and the spiral of bad debts. Confidence in banks has evaporated, making them loath to lend to each other and it more expensive for business to get access to funds.

The New York Times, quoting unnamed government officials, said the Treasury was considering taking ownership stakes in many U.S. banks.

Treasury Secretary Henry Paulson, speaking to reporters, stressed that the recently approved $700 billion financial bailout bill gave him wide authority to inject capital into the banking system and would not rule out having Treasury take an ownership position in banks if necessary.

The bank recapitalization plan, in its preliminary stages, has emerged as one of the preferred options being discussed in Washington and on Wall Street, the New York Times said.

The United States would be taking a leaf out of Britain's book. London said on Wednesday it was prepared to inject 50 billion pounds ($87 billion) of taxpayers' money into its banks and guarantee interbank lending.

Iceland, the country worst affected by the crisis, took control of the its biggest bank Kaupthing KAUP.IC, the third such takeover in a week and suspended all trading in shares.

(Additional reporting by Reuters global bureaus; Editing by Mike Peacock)