Central banks open taps to tackle market squeeze

By Mark Felsenthal, Krista Hughes and Yoko Nishikawa

WASHINGTON/FRANKFURT/TOKYO (Reuters) - The world's top central banks joined forces on Thursday to throw a multibillion-dollar lifeline to global markets in a dramatic effort to free up bank-to-bank lending frozen by upheavals on Wall Street.

In an unprecedented move, the U.S. Federal Reserve made an extra $180 billion available to other major central banks to lend to their local commercial banks in a bid to get U.S. dollars circulating in overnight and short-term money markets.

The latest move brought to $247 billion the total amount of dollars the Fed was providing to other central banks.

In addition, the U.S. central bank pumped an extra $105 billion dollars into the U.S. market, a record amount that built on already large operations earlier this week.

Other central banks, including the Bank of England and the European Central Bank, also lent out extra funds in their own currencies as markets reeled in the wake of a round of takeovers and mergers among top financial firms and renewed concerns about how the U.S. economy will weather the storm.

Investment bank Lehman Brothers Holdings Inc filed for bankruptcy on Monday, roiling markets, and the Fed announced an $85 billion bailout of insurer American International Group on Tuesday, worried a failure could wreak untold havoc worldwide.

U.S. President George W. Bush sought to calm unsettled nerves on Thursday, saying authorities would take further actions if needed.

"The American people can be sure we will continue to act to strengthen and stabilize our financial markets and improve investor confidence," Bush said.

GREASING THE WHEELS

Well-oiled money markets, where banks lend short-term funds to each other to smooth daily swings in their balances, are crucial for the proper functioning of the financial system and the economy at large.

Central banks have responded to a jump in interbank lending rates, exacerbated by investors' flight into safe havens of gold and government bonds, by flooding markets with cash, but so far have had only limited success.

The extra central bank funds helped calm markets, but analysts warned this would likely prove only temporary.

Wall Street stock markets, which hit a three-year low on Wednesday, rose sharply at the end of the session on reports the Treasury Department might consider proposing having the government play a larger role in helping dispose of bad mortgage-related assets.

There was a huge appetite for dollars in auctions held by both the Fed and ECB, but the appetite was lower at the BoE's first dollar auction and at an auction held by the Swiss National Bank. However, demand for pounds at a separate BoE auction was heavy as was demand for euros from an ECB tender.

Barry Moran, senior money market trader at the Bank of Ireland, said the difference in demand at the dollar auctions was partly explained by the ECB accepting a broader range of assets as collateral than the BoE.