World leaders vow crisis action despite divisions

WASHINGTON (Reuters) - World leaders aiming to make the global economy resistant to future crises vowed to work together as they gathered for a Washington summit on Friday, though division on how much regulation is needed was evident.

With host President George W. Bush in his final two months in office and President-elect Barack Obama not participating, hopes for hard conclusions were low but the intent was to kick off a series of meetings to try to prop up sagging economies.

"We need to agree on the importance of coordination of monetary and fiscal policy," British Prime Minister Gordon Brown said en route to the meeting that begins with a White House dinner for political leaders on Friday.

Finance ministers dine separately at the U.S. Treasury and both groups join for about five hours of talks on Saturday, ending in mid-afternoon, when a communique is expected.

Ahead of the meetings, European leaders said the deep global financial crisis -- the worst since the Great Depression of the 1930s -- demonstrated the need for a stricter set of market rules. The 15-nation European Union is now officially in recession and the United States is headed that way.

LIGHT HAND SOUGHT

The United States and Canada, however, urged moderate reforms and ruled out establishing any regulatory authority with power to set rules across borders.

"I don't think the major economies of the world will ... consent to have external control over their regulatory systems," Canadian Prime Minister Stephen Harper told reporters in Winnipeg. "Compulsory governance ... is unrealistic (and) will never be accepted."

Japan similarly said it wouldn't back a global regulatory effort. "We think the fundamental principle should be that capital flows based on the free market should continue to serve as the foundation of the global system," Japanese Foreign Ministry spokesman Kazuo Kodama said.

Still, German Chancellor Angela Merkel told a news conference in Berlin before heading to the U.S. capital that policy-makers need to establish some type of framework to ward off the risk of future crises.

"The government will do everything to ensure there are more rules to prevent such a situation recurring," she pledged, referring to the credit market turmoil touched off by the falling value of U.S. mortgage-related debt.

U.S. Treasury Secretary Henry Paulson, in an interview on CNBC television, said the United States had "in many ways humiliated ourselves as a nation with some of the problems that have taken place here."

Fresh U.S. and European data underlined the severity of the downturn policy-makers face.

The euro zone tumbled into recession in the third quarter and U.S. retail sales posted a record slump last month. Japan and Britain are also on the brink of recession, while China has slowed to destabilizing levels.

U.S. stock prices fell sharply again on Friday as investors worried that the economic picture was darkening.

Brazilian Finance Minister Guido Mantega, after a meeting in Washington with prime ministers and finance chiefs from Britain, Japan and Australia, said both regulatory reform and concerted government spending was needed quickly.

RIGHT TO DEPRESSION

"Rekindling confidence requires clear rules, more transparency," Mantega said. "If we don't take quick action we run the risk of falling into a depression."

Federal Reserve Chairman Ben Bernanke, speaking in Frankfurt, said central bankers around the world stood ready to do more to ease credit strains.

The Washington summit brings together leaders from 19 nations and the European Union under the umbrella of the Group of 20. The group includes emerging markets like China, Brazil, India and South Africa and old-line industrial powers from the Group of Seven nations in what is likely the power constellation of the future.

Ahead of the meeting, Bush pitched for modest reforms to preserve free markets, rather than the stiffer regulation some European nations favor to curb the excesses of capitalism.

The International Monetary Fund and the Financial Stability Forum, a group of finance authorities from leading countries, agreed to a three-tier regulatory plan that would keep the IMF's global oversight role, boost the FSF's role in setting standards for supervision and keep national authorities in charge of implementing them.

The summit was billed as a chance to shift more policy-making power to emerging-market nations. But that may await negotiation, since it would require some rich countries to yield power, which is unlikely to come easily.

However, there have been calls for countries like China and Saudi Arabia that are flush with foreign exchange reserves to play a larger role in throwing a safety net to other emerging nations by more fully funding institutions like the IMF.

Japan's Prime Minister Taro Aso on Thursday offered to lend up to $100 billion to the IMF, but it remained to be seen whether others countries might follow.

(Reporting by Glenn Somerville, Editing by Tim Ahmann)