China downturn deepens, European rate cut sought

By Keith Weir

LONDON (Reuters) - China warned on Thursday that its economic downturn could threaten stability as pressure grew on the European Central Bank to make a big cut in interest rates to help contain the global financial crisis.

In India, emerging Asia's other economic titan, financial markets were closed after Islamist militants killed more than 100 people in the commercial capital, Mumbai.

Violence in India and political unrest in Thailand highlighted political risk as another potential threat to emerging markets battered by the global crisis.

A crisis that began last year with the collapse of the U.S. housing market has spread around the world, bringing several financial institutions to their knees and pushing the United States, Japan and Europe into recession or to the brink of it.

Unemployment is rising in many countries. ArcelorMittal, the world's largest steelmaker, said it would cut up to 9,000 more jobs, saving $1 billion a year.

In France, the number of job seekers rose past the 2 million mark, as the economic crisis took its toll on employment.

CASE FOR MORE RATE CUTS

Central banks around the globe have slashed interest rates to try to ease the flow of credit and restart stalled economies.

Economic sentiment in Europe's single currency zone hit 15-year lows in November and inflation expectations plunged, boosting the case for a big rate cut from the European Central Bank next week.

"The euro zone is in a deep recession, upping the pressure on the ECB to cut interest rates further," said Christoph Weil, economist at Commerzbank. "We envisage a first move next week on a scale of 75 basis points to 2.5 percent."

European governments disagreed on funding for measure to stimulate growth in the European Union, with German rejecting French calls for Berlin to provide billions more euros, and the Irish government saying it has no room for any further fiscal stimulus as it works to slice its deficit.

The Bank of England is also expected to cut rates by 50 basis points or more on December 4, a Reuters poll showed.

Benchmark rates are 3.25 percent in the eurozone and 3.0 percent in Britain, against 1.0 percent in the United States.

China's central bank cut interest rates by the biggest margin in 11 years on Wednesday in response to a crisis that is reining in its once runaway growth, bringing worries about social unrest as jobs disappear.

China's State Information Center forecast annual growth would slow to 8 percent this quarter from 9 percent in the third quarter, a cooling from double-digit rates recorded in the past five years.