U.S. launches support plan as contraction takes hold

NEW YORK (Reuters) - The U.S. Federal Reserve unveiled an $800 billion plan on Tuesday to buy mortgage-related debt and back consumer loans as it tries to revive the U.S. lending market and steer the global economy away from a deep recession.

As the Fed announced its move, the United States posted the sharpest fall in gross domestic product since 2001, likely joining Europe in recession, while China's economy is now expected to grow next year at the slowest pace since 1990.

Mining company BHP Billiton's $66 billion bid for rival Rio Tinto became the latest corporate casualty of global economic turmoil, with BHP blaming the financial crisis and sliding metals prices.

President-elect Barack Obama announced his top budget officials and promised significant spending cuts to partially offset a costly stimulus package that aims to revive the U.S. economy.

The Fed's move is intended to strike at the heart of U.S. economic woes, the collapsed housing market. The resulting meltdown in the high-risk mortgage market engulfed the world and caused the worst financial crisis in 80 years, freezing access to credit, sparking bank collapses and requiring the bailout of entire countries.

Under its latest massive life-support intervention for the U.S. financial system, the Fed is planning a $600 billion program to buy mortgage-related debt and securities and a $200 billion facility to support consumer debt securities.

"This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved financial conditions more generally," the Fed said in a statement.

At the same time, Goldman Sachs sold a greater-than-expected $5 billion of bonds guaranteed by the U.S. Federal Deposit Insurance Corp, a promising start for a government program approved last Friday that is aimed at loosening jammed credit markets.

"HEART OF THE PROBLEM"

Investors generally welcomed the Fed's latest move, although some worried that injecting more dollars into the financial system would spur inflation.

"They (the Fed) are getting to the heart of the problem," said Todd Abraham, co-head of government and mortgage bonds at Federated Investors in Pittsburgh.

"It's clean, it's quick, it's direct. It's a good way to bring down mortgage rates, because at the end of the day they have to stabilize the housing market," he said.

Stocks of home builders and consumer lenders jumped on the Fed's support plan.

U.S. large cap stocks rose briefly in early trading, but fell later. European and Asian stocks gained. Oil fell sharply to below $52 a barrel while the U.S. dollar slumped against the euro and the Japanese yen.

Global data and sentiment surveys confirmed the deepening gloom. The U.S. economy shrank more severely during the third quarter than first estimated as consumers cut spending at the steepest rate in 28 years, according to a Commerce Department report.

It revised the annual rate of decline in third-quarter gross domestic product to 0.5 percent from 0.3 percent, the sharpest fall in GDP since the third quarter of 2001 when the terror attacks against the United States took place.

"I think it anchors the beginning of the U.S. technical recession," said Michael Woolfolk, senior currency strategist with Bank of New York-Mellon in New York. "It's likely to get worse before it gets better."

Prices of U.S. single-family homes also plunged a record 17.4 percent in September from a year earlier, according to a key index released on Tuesday.

Although China, the world's biggest consumer of many metals, this month unveiled a 4 trillion yuan ($586 billion) spending package to prop up its economy, growth would still likely slow to around 7.5 percent in 2009, the World Bank said, which would be China's slowest growth rate since 1990.

Official data confirmed Germany is in recession for the first time in five years.

And falling consumer and business morale in Italy and France pointed to a continent heading for a prolonged recession, with a surprise tick up in consumer sentiment in Germany seen as an isolated and temporary blip.

The European Commission will propose on Wednesday measures to stimulate the recession-hit European economy including VAT cuts and a call for lower European Central Bank rates.

(Additional reporting by Reuters bureaus; Editing by Brian Moss and Steve Orlofsky)