Governments act to stem crisis, markets shaken

By Jeremy Gaunt and Matthias Sobolewski

LONDON/BERLIN (Reuters) - More European governments followed Germany's lead on Monday offering guarantees to savers in a frantic effort to calm fears among investors over the worst financial crisis in 80 years.

However, the moves failed to comfort financial markets as investors from Tokyo to London slashed risk from portfolios and positioned for a further tightening of credit and bank lending and the rising risk of a serious global economic recession.

Despite concerted efforts to stem the crisis, investors were clearly seeking more concrete steps from authorities, perhaps in the form of coordinated action from next weekend's meeting of the Group of Seven industrial nations.

Economies that gained most from the boom in commodities demand and surging global growth in the last three years were at the sharp end of market moves as the once abundant liquidity landscape that has fueled their growth became more arid.

Russia halted share trading for an hour after its benchmark stock index sank more than 14 percent to a three-year low, while Gulf equities crumbled as fears mounted that the fallout from Europe and the U.S. would strike the region.

Governments across the globe battled to restore confidence.

South Korea said it wanted crisis talks with Japan and China.

Sweden became the latest European Union country to act, with the government saying it would expand bank deposit guarantees and the central bank raising the amount of loans offered to banks.

It followed Germany's pledge on Sunday to guarantee private deposit accounts, a move which spurred similar action by Austria and Denmark. Ireland issued the first such guarantee last week, prompting criticism of a fragmented European Union response.

In Spain, Economy Minister Pedro Solbes said the government was prepared to guarantee deposits unilaterally if the European Union did not act.

Finance ministers from the euro zone countries were to meet in Luxembourg on Monday.

"FEAR AND WEAKNESS"

European banks have been hit hard by the fallout from a crisis that began in the United States when the housing market collapsed and bad mortgage debts multiplied.

The banking upheaval that began on Wall Street has effectively shut down interbank and other loan markets, pushing industrialized countries closer to recession.

"We have a seriously weak and fear-driven market on our hands," said Tom Hougaard, chief market strategist at City Index in London.