More banks turn to Treasury

By Emily Kaiser

WASHINGTON (Reuters) - More U.S. banks lined up for government cash on Monday and the Group of Seven expressed concern that Japan's soaring yen currency posed a threat to financial and economic stability as recession worries spread worldwide.

Stock markets worldwide also tumbled again with key Wall Street indexes hitting a 5-1/2-year low.

Officials in Europe and Asia took emergency actions on Monday to shore up their financial positions. South Korea cut interest rates, Australia intervened in the currency market and the International Monetary Fund moved to help Hungary and Ukraine.

The credit crisis, which began with failing U.S. mortgages, has mushroomed into a worldwide rout as investors dump stocks and commodities, shun higher-risk emerging markets and seek out the safest government bonds and currencies.

Yet, promising signs emerged that government efforts to revive credit markets were beginning to pay off.

London interbank lending rates moderated and the U.S. Federal Reserve set the terms for its program to buy commercial paper, bolstering a market that is vital for funding companies' day-to-day business activities.

In the U.S. housing market, one of the sources of the global crisis, sales of newly constructed single-family homes rose in September and inventories shrank, as builders slashed prices to their lowest level in four years.

But U.S. stocks failed to sustain a midday rally as the Dow Jones industrials and S&P 500 fell to 5-1/2-year lows. Japan's Nikkei tumbled 6.4 percent to its lowest close in 26 years and Europe's FTSEurofirst 300 fell 1.7 percent to a 5-1/2-year closing low.

"It is so negative out there, you felt like a skater without any skates -- it couldn't stay up," said Angel Mata, managing director of listed equity trading at Stifel Nicolaus Capital in Baltimore.

"People right now are expecting the worst -- a total collapse of the hedge fund industry with half of them (hedge funds) not existing anymore. Moms and pops with 401(k)s are saying, 'I have had enough and don't want to be in there any more,'" Mata said.

Financial companies including Comerica Inc, SunTrust Banks Inc and State Street Corp agreed to sell stakes to the U.S. Treasury Department in exchange for cash infusions -- part of the $700 billion rescue plan approved by Congress earlier this month.

The U.S. government was also considering at least $5 billion in aid to facilitate a merger between hobbled auto makers General Motors Corp and Chrysler LLC, according to a source familiar with Treasury's thinking.

Loews Corp, a conglomerate run by the billionaire Tisch family, said it would inject up to $1.25 billion in new capital into its CNA Financial Corp commercial insurance unit after bad investments drove up losses.

The U.S. central bank is expected to trim short-term interest rates at its policy-setting meeting later in the week, and British Prime Minister Gordon Brown hinted that central bank action may be widespread.

European Central Bank President Jean-Claude Trichet said a rate cut next week was a possibility, though not a certainty.