Politicians preach calm as fear, panic rule

By Brian Love and Jonathan Stempel

PARIS/NEW YORK (Reuters) - Shares plummeted worldwide on Thursday, although U.S. stocks staged a late-session comeback, while politicians weighed in to calm financial markets swept by fears that years of runaway credit growth will end with a big blowout.

The largest U.S. mortgage lender, Countrywide Financial Corp., tapped out an $11.5 billion credit line, and another lender stopped funding home loans as companies scrambled for cash and credit markets seized up. At one point, Countrywide's shares were down as much as 30 percent.

"It's fear and panic," said David Bianco, chief U.S. equity strategist at UBS in New York. "People are beginning to lean toward outlooks now of all the dominoes falling, that the U.S. economy slides into recession because of this credit crunch, and it has an adverse impact on the global economy and even the globally exposed sectors."

A strong rally in the last few minutes of trading left the blue-chip Dow Jones industrial average down just 16 points, erasing an earlier drop of more than 340 points.

Financial stocks led the way on optimism that regulators may let the two biggest U.S. mortgage funding companies -- Fannie Mae and Freddie Mac -- play a bigger role in steadying the ailing housing industry.

First Magnus Financial Corp., the 16th-largest U.S. mortgage lender, said it stopped funding home loans and taking mortgage applications. It cited the "collapse" of the secondary market where lenders typically would try to resell mortgages to generate more cash for future lending.

National City Corp., a big Cleveland, Ohio-based bank, folded its home equity unit into its main mortgage unit to save money, resulting in job cuts.

French President Nicolas Sarkozy, on vacation in the United States, said the global economy is enjoying its best run of growth in decades and could withstand the market turmoil, though governments should remain on guard.

The White House declined to comment on the sharp moves in financial markets, and stuck to its view that the U.S. economy was fundamentally sound and should continue to grow.

A report from the Philadelphia Federal Reserve Bank that showed factory activity in the U.S. Mid-Atlantic region stagnated in August raised concerns about the health of the economy and pressured stocks.

GLOBAL SELL-OFF

Shares plunged in Asia and Europe, and more steeply in the emerging markets of Eastern Europe, South Africa and Latin America. Demand for the government bonds of wealthy countries rose at the expense of riskier debt and credit.

European shares suffered their biggest one-day fall in four years with the FTSEurofirst 300 stock index closing around 3.2 percent lower, at 1,443.89 points.

Britain's Treasury said that economy was strong and well positioned to absorb market shocks.

"Fear of the unknown, i.e. credit quality, is starting to trigger panic and indiscriminate selling," said Marco Annunziata, chief economist at UniCredit, a big European investment bank.