World's central banks move to calm Lehman storm

By Yoko Nishikawa and Marc Jones

TOKYO/FRANKFURT (Reuters) - European and Asian central banks followed the U.S. Federal Reserve on Monday in trying to support markets wilting under the bankruptcy of Lehman Brothers and the sale of crisis-hit Merrill Lynch.

The dollar and stocks tumbled in Asia and Europe and safe-haven debt soared after emergency weekend talks failed to save 158-year-old Lehman from becoming the latest victim of the credit crisis that began 13 months ago.

The Fed, preparing for gyrations in the week ahead, announced emergency measures on Sunday, including accepting equities as collateral for cash loans at one of its special credit facilities for the first time in its 90 year history.

Central banks of other Group of Seven industrialized nations said they were watching markets and stood ready to act.

"We are monitoring financial market conditions while in contact with the Fed and authorities from other countries," a source at the Bank of Japan told Reuters on the customary condition of anonymity.

The yen, a haven at times of risk aversion, was headed for its biggest daily gain against the dollar since 2002, in trading thinned by a holiday in Japan, Hong Kong, China and Korea.

The European Central Bank said it was "ready to contribute to orderly conditions in the euro money market." The Bank of England said it would act if necessary.

The Bundesbank, Germany's central bank, said the country's banks have a "manageable" exposure to Lehman. It was in touch with partners at home and abroad, it said.

The Swiss National Bank said it would respond "flexibly and generously" to money markets and followed that up with an offer of extra liquidity to prevent nervous lenders from clogging the pipes of the financial system.

The Reserve Bank of Australia, overseeing the biggest financial markets open during the Asian day, provided the banking system with more money than its estimated need on Monday.

In its regular daily money market operation, the central bank added A$2.1 billion ($1.7 billion) in cash. That was well above the market's estimated need of A$828 million.

Money markets seized up as the credit crisis triggered by U.S. mortgage defaults broke last year. Since then global banks have written off more than $400 billion in credit market losses.

One of the casualties, Merrill Lynch, agreed to sell itself to Bank of America, becoming the third of Wall Streets big five investment banks to succumb to the crisis after Lehman and Bear Stearns.

Analysts said cash and words may not be enough to steady market nerves.

"There is now speculation that the Fed might decide an emergency rate cut to help the market absorb the stress. This cannot be excluded if signs of meltdown materialize," said Marco Annuziata, global chief economist at Unicredit in London.

"But we think the Fed will try to avoid this step."

(Writing by Jan Dahinten, Asia Desk, Singapore; editing by Neil Fullick)