G7 pledges urgent, decisive action as markets reel

By Emily Kaiser and Claudia Parsons

WASHINGTON/NEW YORK (Reuters) - Finance chiefs of the world's major economies pledged on Friday to prevent big banks from collapse and to work together to stem the financial crisis after another day of gut-wrenching drops on world markets.

"The current situation calls for urgent and exceptional action," finance officials of the Group of Seven major industrialized nations said following their meeting in Washington. They pledged to use "all available tools," but did not announce specific measures.

Reeling from the loss of trillions of dollars of wealth, investors worldwide had pinned their hopes on decisive action from the G7. U.S. stocks pared massive losses in a late recovery after a day of sharp moves.

"We commit to continue working together to stabilize financial markets and restore the flow of credit, to support global economic growth," officials of the G7, which includes the United States, Canada, Britain, France, Italy, Germany and Japan, said in a statement.

They said that would include using all available tools to prevent systemically important financial institutions from failure and ensuring that banks can raise capital from public and private sources.

Investors, however, were not immediately convinced of the G7's effectiveness.

"The markets wanted maybe more assurance that there would be a unified global backstopping of the banks, and it doesn't sound like that's in there," said Kim Rupert, managing director of global fixed income analysis at Action Economics LLC in San Franciso. "This week has been absolutely brutal. ... If this is the extent of it from G7, then we could be in for more trouble on Monday."

Enrique Alvarez, head of Latin America debt strategy at Ideaglobal in New York, said he was disappointed by the G7 statement. "I think they had to come with a much stronger commitment in order to tackle the freeze in the credit market and the absolute lack of confidence in the G7 government leadership by the markets, equities in particular.

U.S. Treasury Secretary Henry Paulson, warning that the United States was facing a prolonged period of uncertainty, and said Washington was developing plans to purchase equity stakes in financial institutions.

Such a move would be similar to measures that Britain has announced to put money into struggling banks.

Concerted interest-rate cuts by major central banks around the world, individual liquidity injections, and a $700 billion U.S. bailout plan have so far failed to restore confidence.

Investors, leading nations and the International Monetary Fund had all clamored for a united front as nose-diving share prices suspended trade on bourses from Indonesia to Austria and emerging market currencies crumbled.

Leaders of euro zone countries will meet in Paris on Sunday in a new European attempt to find a united response.

WORLD MARKETS REEL, WALL STREET RALLIES LATE

U.S. stocks crawled back in the final hour of trade with the Dow trimming losses to 1.5 percent on a day in which it traded in a 1,000-point range. The eighth straight day of losses left the Dow down 18 percent for the week.