Geithner rallies stocks but Citi still ailing

NEW YORK (Reuters) - President-elect Barack Obama wants New York Federal Reserve President Timothy Geithner as his Treasury secretary, news that sparked a stock market surge on Friday and fostered confidence that Obama may be taking up the U.S. economic reins before his inauguration in January.

A senior Democrat told Reuters in Washington that Obama favors Geithner for the Treasury job, but had yet to make an offer. NBC News and The Wall Street Journal reported Geithner will be named when Obama unveils his economic team early next week, boosting stocks, which had been dragged down by fears over the financial health of Citigroup.

Geithner has overseen much of the financial industry based in New York and was active in emergency measures taken by Fed Chairman Ben Bernanke and outgoing Treasury Secretary Henry Paulson. He was seen as a favorite of the markets.

"It is a brilliant pick, for no other reason than that it creates continuity in the middle of one of the greatest crises to ever face this country," said William O'Donnell, head of U.S. interest rate strategy at UBS Securities in Stamford, Connecticut.

When the news broke an hour before the close of New York stock trading, it turned a flat Dow Jones industrial average into a 6.5 percent gain the day after the broader market slumped to an 11-year low amid signs of deep recession.

It appeared to be a rare bit of optimism in the greatest world financial crisis since the 1930s Great Depression. In Europe, new data showed euro zone demand plunged, and world central bankers considered the prospect of deflation as the Bank of Japan left its benchmark interest rate at just 0.3 percent, saying the road to recovery would be long.

Amid a power vacuum in Washington, with Obama not taking over from George W. Bush until January 20, House of Representatives Speaker Nancy Pelosi pledged support for a U.S. stimulus package and aid for sputtering U.S. carmakers.

Obama's cabinet choices were shaping up further, with The New York Times reporting that Sen. Hillary Clinton had accepted the position of secretary of State.

The Geithner news even helped Citigroup, whose stock recovered from a 35 percent fall to end down 20 percent, temporarily at least stopping a plummet over concerns the bank would sell major businesses to restore its health and investor confidence.

Chief Executive Vikram Pandit told employees he would not break up the company, whose board was meeting on Friday.

Many analysts said swift government action was needed to save Citi, possibly this weekend, much the way Paulson and Bernanke have intervened in recent months with Geithner at their side.

"There are two choices: one is you sell the company into what is perceived to be stronger hands, or you go to the government and get a massive bailout," said Paul Harris, a portfolio manager at Avenue Investment Management in Toronto.

"I think the Treasury is going to exert itself some time over the next few days. This just cannot go on," added Nancy Bush, an analyst at NAB Research in New Jersey.

PELOSI STEPS UP

Pelosi also vowed congressional help for the auto industry, saying "doing nothing is not an option" and that she was prepared to call the House back into session in December.

Pelosi also told reporters that passage of a broad economic stimulus bill, including tax cuts, will be a top priority of the next Congress when it convenes in January.

The European Commission was working on its own stimulus plan that would include a significant budgetary expansion for European Union members, Commission President Jose Manuel Barroso said.

The Markit Eurozone Purchasing Managers composite index, which covers the manufacturing and services sectors, tumbled to a record low of 39.7 in November.

That added to expectations the European Central Bank will cut rates by at least a half percentage point when it meets in December.

Investment bank Goldman Sachs forecast more pain, estimating real U.S. gross domestic product would fall 5 percent on an annual basis in the current quarter, with unemployment reaching 9.0 percent in the fourth quarter of 2009.

A 5 percent contraction would be the largest since the first quarter of 1982, when the economy shrank 6.4 percent on an annualized basis.

Bank of Japan Governor Masaaki Shirakawa said he was on watch for the risk of deflation as Japan lapses into recession, although he did not forecast its return.

"The global economy is expected to experience a severe adjustment for some time," he told reporters.

(Reporting by Reuters bureaus around the world; Writing by Daniel Trotta; Editing by Dan Grebler)