Russian talks to bail out Iceland as crisis bites

REYKJAVIK/LONDON (Reuters) - Russia negotiated an emergency bailout for Iceland and unveiled an aid package for its own banks on Tuesday, while Japan called for greater coordination in tackling the global financial crisis.

Australia reacted by cutting interest rates by 100 basis points to 6.0 percent, putting pressure on Western central banks to lower the cost of borrowing when many economies appear to be flirting with recession.

Japanese Prime Minister Taro Aso said he hoped the Group of Seven rich nations would send a firm message on stabilizing financial markets when it meets later this week in Washington.

"The impact would be substantial if the G7 didn't send a clear message. European leaders have met, but it didn't go well, and European financial markets have fluctuated rapidly and substantially, so I'm worried about the impact on Japan," Aso told reporters.

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

Sparked by the collapse in the U.S. housing market and increase in bad loans, the crisis is the worst to hit the banking world in 80 years.

Around the globe, people are worried about protecting savings and keeping their jobs as some of the pillars of international finance give way.

ICELAND ACTS

Home to 300,000 people, Iceland used emergency powers adopted on Monday to dismiss the board of Landsbanki and put its second largest bank into receivership.

Iceland also propped up its battered currency and said it planned to send a delegation to Russia to discuss a 4 billion euro ($5.44 billion) loan to help it through a financial meltdown that threatens national bankruptcy.

Russian President Dmitry Medvedev announced an extra 950 billion roubles ($36.4 billion) of new credit for banks at an emergency Kremlin meeting after Russian stocks suffered their worst pounding ever the previous day.

Medvedev said that most of the money, which is offered over five years, would be channeled through the biggest two state- controlled banks, Sberbank and VTB.

British banking chiefs were to hold a conference call with the government later on Tuesday. Shares in some of Britain's biggest retail banks plunged on reports of a possible injection of public funds.

RATE CUTS?

In the United States, a source familiar with discussions between the U.S. Treasury and the Fed said officials were considering setting up a lending program aimed at thawing the $1.6 trillion U.S. commercial paper market.

The market is an integral for the smooth operation of many U.S. businesses that use the marketplace to fund operations on a short-term basis.

Economists said the Australian rate cut might be followed in Europe and the United States.

Economists at Citi said there seemed to be "a growing chance" of emergency rate cuts from the Bank of England and the European Central Bank in the next few days, especially if the Federal Reserve was ready to move.

U.S. stock futures pointed to a lower opening on Wall Street on Tuesday in the absence for the moment of any coordinated response from central banks.

Bill Gross, one of the most influential U.S. investors as head of the world's largest bond fund and chief investment office of Pimco, called for the Fed to cut interest rates to 1 percent from 2 percent.

"We are experiencing asset deflation and the threat of headline inflation is long past," he said in a note.

Japan's central bank, with far less room to maneuver, voted to keep rates unchanged and played down speculation it would join other central banks in cutting rates.

EU GUARANTEE

European Union finance ministers agreed to guarantee bank deposits up to 50,000 euros, against 20,000 euros under current rules, a document viewed by Reuters said.

Ministers agreed that the ceiling should be "raised to 50,000 acknowledging that many are determined to raise the minimum to 100,000 euros," the document said.

A number of EU countries have broken ranks by offering various forms of blanket guarantees to savers, prompting criticism that the bloc was divided.

(Reporting by Reuters bureaus worldwide; Editing by Ralph Boulton)