TOPWRAP 10-World's central banks cut rates to rescue economy

* Fed cuts rates by 50 basis points

* Europe, Britain, China, follow suit

* U.S. stocks turn positive after initial fall

* Britain offers banks 50 billion pound injection

* IMF issues bleak outlook, U.S. retail sales disappoint (For full coverage double click [nCRISIS]

By Daniel Trotta and Keith Weir

NEW YORK/LONDON, Oct 8 (Reuters) - Central banks around the world cut interest rates in unison on Wednesday to limit economic damage from the worst financial crisis in 80 years, giving a temporary boost to battered stock markets.

In an unscheduled announcement made as New York traders were reaching their offices, the U.S. Federal Reserve said it was cutting its key federal funds rate by 50 basis points to 1.5 percent.

China, the European Central Bank and central banks in Britain, Canada, Sweden and Switzerland also cut rates in a coordinated response that investors and world leaders had been demanding.

For a summary of all the central bank actions, double-click on [ID:nL8122554] Lead story [ID:nL8116323]

"The central banks of the world have finally woke up to the gravity of the current situation," said Charles Diebel, the head of interest rates strategy at Nomura. "This is a major step in convincing the world that they are serious about stabilizing."

The coordinated cuts included China for the first time. The Bank of Japan said it saw no need to cut Japanese interest rates but that it strongly supported the coordinated rate cuts. [ID:nT121485]

U.S. stocks [.N] fell at the start of trade with the Dow .DJI, the Nasdaq .IXIC and the S&P 500 .SPX all down more than 2 percent at the open, but quickly recovered in morning trade. European shares received a temporary bounce. [ID:nL8649866]

The central bank action contrasted with more grim macroeconomic news, and some analysts questioned whether the move would work.

The International Monetary Fund issued its bleakest forecast in years, saying the world economy was set for a major downturn with the United States and Europe either in or on the brink of recession. [ID:nWEQ000263]

Overnight interbank lending rates fell after the central bank cuts, but longer-term borrowing rates remained stubbornly high, suggesting banks were not yet confident enough to clear the lending logjam.

"The fact that we have got them coming across the board suggests that this is the end game," said Peter Dixon, an economist at Commerzbank in London. "Will it help the markets? Questionable in the short term."

The U.S. approved a $700 billion package last week to rescue its ailing banks but failed to rally its markets, and central banks repeatedly injected liquidity into money markets, also without success.

Britain on Wednesday said it would pump 50 billion pounds ($87 billion) of taxpayers' money into its banks, with Prime Minister Gordon Brown predicting other countries would follow. [ID:nL8586784]

Italy prepared to announce its own measures, which sources said could be based on the British model, while Spain has said it is setting up a 30 billion euro fund to buy assets from banks and keep credit flowing.

Facing financial meltdown, Iceland has taken over two of its largest banks -- Landsbanki and Glitnir -- and is seeking a 4 billion euros ($5.4 billion) loan from Russia. [ID:nL8224339]

Earlier, Hong Kong unveiled a surprise rate cut, slashing its main interest rate 100 basis points to match a similar cut by Australia a day earlier. [ID:nHKG122739]

The rate cuts were in response to days of clamoring for concerted action by world leaders and market players.

The equity sell-off has eviscerated some $4.6 trillion of global stock market wealth in the past three weeks alone, according to the market capitalization loss on MSCI's main world equity index .MIWD00000PUS.

Over the last 12 months, that figure is more than $12.4 trillion, of which some $7 trillion comes from the United States.

Not surprisingly, the economy has taken center stage in the U.S. presidential campaign less than four weeks to go before the Nov. 4 election.

In the second of three debates, Republican John McCain on Tuesday promised, if elected, to buy mortgages from homeowners facing financial problems and replace those mortgages with new, fixed-rate mortgages. His campaign said it would cost roughly $300 billion. [ID:nN08492907]

Democrat Barack Obama said McCain and Republicans had supported the deregulation of the financial industry that led to the crisis. He said middle-class workers, not just Wall Street, needed a rescue package that would include tax cuts.

For the latest on the campaign, double-click on [ID:nN19361994] (Additional reporting by Reuters global bureaus; Editing by Brian Moss, Steve Orlofsky and Mike Peacock)