Central banks cut rates, but markets stay fearful

By Daniel Trotta and Kevin Krolicki

NEW YORK/WASHINGTON (Reuters) - Central banks around the world cut interest rates in unison on Wednesday but the unprecedented move failed to help battered stocks, thaw credit markets or temper forecasts for a sharp global economic downturn.

U.S. stocks closed down for a sixth straight session after heavy and volatile trade that saw gains fade in the final hour amid uncertainty about whether the lower interest rates would avert recession.

The S&P 500 index .SPX> closed down 1 percent and has shed 15 percent this month. Wall Street's benchmark of fear, the Chicago Board Options Exchange Volatility Index .VIX>, hit a record high as investors scrambled for cover.

Shares in Europe and Latin America posted deeper losses, extending a rout that has cost investors about $12 trillion over the past year, an amount equal to the entire value of the U.S. mortgage market.

"We're sitting between the abyss, which is the unthinkable, which is the breakdown of the financial system, or a deep and sustained recession," said Kirby Daley, a strategist at Newedge Group.

Prices for oil and other commodities fell as investors rolled back to cash and gold -- safe havens in fear-wracked markets.

The coordinated rate cuts were the latest salvo from financial policymakers in response to a crisis that has unsettled global investors, toppled banks in the United States and Europe and reshaped the U.S. presidential election.

Shoring up the capital of European banks remained a priority for governments and investors.

Britain said it was prepared to inject 50 billion pounds ($87 billion) of taxpayer money into its banks.

Italy vowed that no Italian bank would collapse, and said it would offer public funds in return for non-voting shares where needed.

Iceland seized control of a second large bank, and abandoned support for its withering currency. Prime Minister Geir Haarde said Iceland had not asked for help from the International Monetary Fund, but said assistance from the IMF was "definitely an option" and separately said negotiations to secure a 4 billion euro ($5.45 billion) loan from Russia would begin next Tuesday.

Diplomatic sources said that senior ministers of France, Belgium and Luxembourg would meet in Brussels on Wednesday evening to discuss the future of financial group Dexia after its shares fell another 15.4 percent and its credit rating was downgraded by Standard & Poor's for the second time in a week.

The U.S. Federal Reserve cut its federal funds target rate by half a percentage point to 1.5 percent, and China, the European Central Bank and central banks in Britain, Canada, Sweden and Switzerland followed suit.

The coordinated cuts included China for the first time. The Bank of Japan said it saw no need to cut Japanese interest rates but that it strongly supported the coordinated action.

Earlier, Hong Kong slashed its main interest rate by a full percentage point to match a similar cut by Australia a day earlier.