U.S. to pump $250 bln into banks, economies struggle

By Jeremy Pelofsky and Tabassum Zakaria

WASHINGTON (Reuters) - The United States pledged on Tuesday to pump $250 billion into its banks, following similar action in Europe, but data showed the threat of recession has not been banished even if a financial sector meltdown has.

In Europe, major economies showed signs of flagging output and falling business confidence, but smaller countries also suffered acutely. Iceland sought to save its economy at loan talks in Moscow, while its stock market plunged 76 percent.

Under the U.S. Treasury plan, the government will buy preferred shares in qualifying financial institutions, with stakes in each limited to $25 billion.

U.S. Treasury Secretary Henry Paulson said 9 banks described as "healthy institutions" had agreed to accept government stakes for the good of the U.S. economy -- a state intervention unthinkable before a crisis widely compared to the great crash of the 1930s.

"Government owning a stake in any private U.S. company is objectionable to most Americans, me included.," he said. "Yet the alternative of leaving businesses and consumers without access to financing is to tally unacceptable."

President George W. Bush called it an essential step to ensure the viability of America's banking system,"

Federal Reserve Chairman Ben Bernanke promised continued action to stabilize financial markets.

"We will not stand down until we have achieved our goals of repairing and reforming our financial system and thereby restoring prosperity to our economy," he said in a statement.

The Treasury will buy stakes in Bank of America, Wells Fargo, Citigroup, JPMorgan Chase, Goldman Sachs, Morgan Stanley and Bank of New York Mellon Corp, two sources said.

Media reports said State Street Corp and Merrill Lynch would also receive a capital injection.

Similar moves in Europe helped restore confidence among investors on Monday.

London, Berlin, Paris and others pledged more than 1 trillion euros ($1.36 trillion) in direct capital injections for banks and to underwrite lending between banks that has all but frozen, choking off funds that drive business and industry.

"Day The Markets Breathed Again" ran the headline in Britain's Guardian newspaper above a photograph of the London City skyline, caught in a golden twilight.

Japan joined the global push, saying it could inject public funds into regional banks to make sure small firms can get cash.

Even the Gulf with its oil revenues is acting. The United Arab Emirates will pump 70 billion dirhams ($19 billion) of emergency funding into its banking sector.