G7 pledges urgent, decisive action as markets reel

WASHINGTON/NEW YORK (Reuters) - Finance chiefs of the world's major economies pledged on Friday to prevent big banks from collapse and to work together to stem the financial crisis after another day of gut-wrenching drops on world markets.

"The current situation calls for urgent and exceptional action," finance officials of the Group of Seven major industrialized nations said following their meeting in Washington. They pledged to use "all available tools," but did not announce specific measures.

Reeling from the loss of trillions of dollars of wealth, investors worldwide had pinned their hopes on decisive action from the G7. U.S. stocks pared massive losses in a late recovery after a day of sharp moves.

"We commit to continue working together to stabilize financial markets and restore the flow of credit, to support global economic growth," officials of the G7, which includes the United States, Canada, Britain, France, Italy, Germany and Japan, said in a statement.

They said that would include using all available tools to prevent systemically important financial institutions from failure and ensuring that banks can raise capital from public and private sources.

Investors, however, were not immediately convinced of the G7's effectiveness.

"The markets wanted maybe more assurance that there would be a unified global backstopping of the banks, and it doesn't sound like that's in there," said Kim Rupert, managing director of global fixed income analysis at Action Economics LLC in San Franciso. "This week has been absolutely brutal. ... If this is the extent of it from G7, then we could be in for more trouble on Monday."

Enrique Alvarez, head of Latin America debt strategy at Ideaglobal in New York, said he was disappointed by the G7 statement. "I think they had to come with a much stronger commitment in order to tackle the freeze in the credit market and the absolute lack of confidence in the G7 government leadership by the markets, equities in particular.

U.S. Treasury Secretary Henry Paulson, warning that the United States was facing a prolonged period of uncertainty, and said Washington was developing plans to purchase equity stakes in financial institutions.

Such a move would be similar to measures that Britain has announced to put money into struggling banks.

Concerted interest-rate cuts by major central banks around the world, individual liquidity injections, and a $700 billion U.S. bailout plan have so far failed to restore confidence.

Investors, leading nations and the International Monetary Fund had all clamored for a united front as nose-diving share prices suspended trade on bourses from Indonesia to Austria and emerging market currencies crumbled.

Leaders of euro zone countries will meet in Paris on Sunday in a new European attempt to find a united response.

WORLD MARKETS REEL, WALL STREET RALLIES LATE

U.S. stocks crawled back in the final hour of trade with the Dow trimming losses to 1.5 percent on a day in which it traded in a 1,000-point range. The eighth straight day of losses left the Dow down 18 percent for the week.

U.S. stocks have lost $2.4 trillion this week and $8.4 trillion in the past year, according to the Dow Jones Wilshire 5000.

The rally only partially resurrected the shares of Morgan Stanley and Goldman Sachs, pummeled when credit rating agency Moody's Investors Service said it might cut their ratings, reviving concerns about the viability of their banking models.

Scrambling for safety, investors pulled a net $43.3 billion from U.S. mutual funds investing in equities so far in October while pouring nearly $60 billion in money-market mutual funds.

European shares closed out their worst week ever, with the pan-European FTSEuroFirst 300 index shedding 22 percent for the week after closing down 7.6 percent. The FTSEurofirst 300 closed at 851.23 points, its lowest close since July 2, 2003.

"It's total panic. People are so scared that they are looking to liquidate everything that has cash value and to stay away from everything," said Bruce Dunn, vice president of trading at New Jersey-based Auramet Trading.

In one glimmer of hope, there were signs of the start of a thaw in the credit markets. Interest rates on U.S. overnight commercial paper dropped after overnight dollar and euro rates fell closer to central banks' new lower targets.

Consumers also stood to benefit from lower oil and commodities prices. U.S. benchmark crude fell almost 10 percent to around $78 per barrel. U.S. corn and soy futures fell about 7 percent each.

The U.S. dollar surged as investors scrambled for cash in the world's reserve currency.

Emerging market assets fell to multi-year lows and a handful of emerging market bourses stayed shut on Friday rather than risk further declines.

Russia raised bank deposit guarantees as its banking crisis deepened, with one bank's license revoked and another asking clients to repay mortgages.

Russia on Friday also said it would stump up cash to support battered stock prices, launching an aid package worth around 5 percent of the value of Russia's traded shares.

Iceland, among the most dramatic casualties of the crisis, sought to reassure international investors caught in its banking meltdown, saying it would honor its obligations.

Under pressure as their shares plunge, U.S. car makers General Motors Corp and Ford Motor Co both ruled out seeking bankruptcy protection at a time when slow auto sales and the credit crunch have rattled investors.

Many investors have been looking for global leadership, but U.S. President George W. Bush is a lame duck ahead of the November 4 presidential election. Democratic nominee Barack Obama said the crisis required coordinated international action, and Republican John McCain argued his experience made him the candidate who can lead at a time of economic tumult.

(Additional reporting by Reuters bureaus around the world; Editing by Brian Moss, Steve Orlofsky, Toni Reinhold, Leslie Adler)