World leaders called on the US government to take action to stave off global financial collapse Tuesday after Congress rejected a 700 billion dollar bailout in a move which stunned global markets.
Another European bank, Dexia, had to be rescued and shares went through another roller coaster ride after the House of Representatives voted 228-205 against the rescue on Monday.
European leaders led the calls for action by President George W. Bush who called close advisors into emergency talks after the defeat and was to make a statement on Tuesday.
"The US must take its responsibilities in this situation, must show statesmanship for the sake of their own companies and for the sake of the world," European Commission spokesman Johannes Laitenberger said.
German Chancellor Angela Merkel called for another vote on the plan this week to restore market confidence.
British Prime Minister Gordon Brown said he had sent a message to the White House to underline "the importance that we attach to taking decisive action". New Japanese premier Taro Aso said: "We should not let the world financial system collapse."
Australian Prime Minister Kevin Rudd said that he and other US allies would press Washington to take action.
US Treasury Secretary Henry Paulson warned US lawmakers they had to act fast after his plan was dramatically rejected Monday.
"Markets around the world are under stress," said Paulson, architect of the proposal to buy up the mountains of bad mortgage-related debt behind a wave of home foreclosures and spectacular bank failures.
"We need to get something done," he added. "This is much too important to simply let fail."
Central banks again poured money into markets an attempt to revive the global banking system but stocks rallied slightly in Europe after an initial slump following the lead set by Wall Street and Asian markets.
London shares dropped initially, but later showed a slight gain of 0.22 percent, Paris was up 0.21 percent but Frankfurt was down 0.75 percent after a 4.1-percent fall in Tokyo, and losses in Asia except in Hong Kong which gained 0.8 percent.
The Dow Jones Industrial Average sank 777.68 points or 6.98 percent on Monday, in a record points fall amid panic after the House vote.
Hiroichi Nishi, equities chief at Nikko Cordial Securities in Tokyo, said: "The market is exploring where the bottom is now."
French-Belgian bank Dexia was rescued by the French, Belgian and Luxembourg governments which put in 6.4 billion euros (9.2 billion dollars). Governments also had to step in to save Dutch-Belgian bank Fortis and Britain's Bradford & Bingley this week.
French President Nicolas Sarkozy called a pre-dawn meeting of key advisors and after talks with top bankers promised measures before the end of the week. A senior official in his office said. "Banks are in trouble in Germany, Belgium and Great Britain. We feel a bit surrounded."
France and Ireland reassured people with deposits in banks that their money was safe, echoing similar statements across Europe.
The euro fell again, to 1.4376 dollars in London from 1.4432 in New York because "credit worries are deepening over the European financial system," said Saburo Matsumoto at Sumitomo Trust Bank.
"The euro may fall further," he said. "We fear the credit worries may spread into emerging economies."
A vacuum of fear is causing a desperate shortage of funds in the interbank system, despite infusions from central banks, and is a critical factor in pressures that have brought down many top names in US and European banking.
Some analysts now suggest there could be concerted central bank action to cut interest rates because likely economic slowdown, even recession, arising from the crisis would sharply cut inflationary pressures.
"Central banks emergency cuts: if not now, when?" asked Citi analysts in London. But some other analysts doubted that there would be a pan-European initiative.
Around the world officials and commentators used the language of disaster and despair to describe the possible impact of further delay in US action on the world economy and especially the interbank lending system.
In London, a leading global financial centre along with New York, The Guardian newspaper said: "This has become a crisis of confidence in the banking system as a whole, which is unprecedented in modern times."
The Times wrote: "The collapse of the plan threatens all of Main Street, in America and further afield."
Central banks again pumped out huge sums to keep global banking liquid with the European Central Bank renewing one-day loans of 30 billion dollars (20.8 billion euros). It also allocated 190 billion euros under a regular arrangement which once again revealed great tension on short-term bank interest rates.
The Japanese central bank injected 3.0 trillion yen (28.8 billion dollars).
Former World bank chief economist and Nobel economics prizewinner Joseph Stiglitz, forecasting that the crisis would ensure that Democrat candidate Barack Obama would win the presidential election.
"We will have other dramatic failures of financial institutions. The American economy is headed into a long recession."
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