Fed aids money markets as IMF readies rescues

NEW YORK/WASHINGTON (Reuters) - The U.S. Federal Reserve launched a new plan to help relieve pressure on strained financial markets on Tuesday, joining the latest round of emergency measures around the globe to curb the world financial crisis.

Japan and France earlier extended more help to banks and the IMF prepared to intervene in trouble spots such as Pakistan, Ukraine and Iceland.

Interbank lending costs came down again, offering tentative signs of renewed confidence in the financial system, as weeks of bailouts and rescue plans appear to have cooled the worst crisis since the 1930s Great Depression.

Governments around the world have promised $3.3 trillion (1.97 billion pounds) to guarantee bank deposits and bank-to-bank lending, and in many cases have taken stakes in struggling banks.

"The market is cautiously testing the water," said Meg Browne, senior currency strategist at Brown Brothers Harriman. "We've had some improvement from the degree of uncertainty and nervousness we had last week, but it may take more money from governments around the world before we return to normal."

U.S. stocks, which had been hit by continuing investor concerns about slipping corporate earnings, resumed their slide in late afternoon trading. The Dow Jones Industrial Average, which had earlier been off some 200 points, was down about 120 points, or 1.3 percent, and the broader S&P was off about 16points, or 1.6 percent.

Caterpillar Inc said its third-quarter earnings fell, and warned that the heady sales growth it experienced in recent years is grinding to a halt as weakness that has dogged the heavy equipment maker in the United States spreads into Europe and Asia.

Chemical giant DuPont cut its 2008 earnings outlook, and major asset manager BlackRock Inc reported a profit that fell below market expectations.

The Fed said it could lend up to $540 billion that could be used to buy certificates of deposit and commercial paper to shore up money market mutual funds, which reeled this month after too many investors tried to take their money out at once.

The Fed action was aimed at helping money market mutual funds meet their redemptions. Funds had become anxious about their liquidity and were reluctant to lend.

"This is a very big event," Laurence Fink, chairman and CEO of BlackRock, told a conference call. "It will allow people like BlackRock and other money market funds to start extending our purchases of (commercial paper)."

In a previous attempt to spark lending, the Fed on October 7 agreed to buy commercial paper -- the short-term debt companies use to fund day-to-day operations. The Fed also agreed on September 19 to lend to banks to fund purchases of asset-backed commercial paper from money markets.

The U.S. dollar raced to a year-and-a-half high against a basket of currencies as investors and companies continued to deleverage.

The stronger dollar, in turn, sent gold and oil prices down nearly 4 percent.

Japanese stocks closed 3.3 percent higher and European shares reversed earlier gains to close down 0.8 percent.

IMF TO THE RESCUE

The International Monetary Fund stood ready to help Pakistan, which said it needed up to $15 billion to avert a balance of payments crisis.

Ukraine also said it was close to agreeing to measures to allow it to receive IMF aid. Iceland as well appeared close to a deal with the IMF.

In the United States, the economy continued to dominate the presidential campaign two weeks before the November 4 vote. Democrat Barack Obama, who extended his lead over Republican John McCain to 8 percent in the polls, convened a panel of economic advisers and accused McCain of fumbling his response to the crisis.

France's banks won some respite from the ravages of the financial crisis through a 10.5 billion-euro (8.3 billion pounds) state cash injection, although analysts said the banks may yet need more help.

However, the Bank of England said Britain's economy is probably entering its first recession in 16 years, and the outlook has not worsened as rapidly as it has in the past month for a very long time, Bank governor Mervyn King said.

"Not since the beginning of the First World War has our banking system been so close to collapse," King said, according to a copy of his speech provided by the BoE.

"We are far from the end of the road back to stability, but the plan to recapitalize our banking system, both here and abroad, will, I believe, come to be seen as the moment in the banking crisis of the past year when we turned the corner."

The sterling fell 2 percent after King's comments.

In Japan, Economics Minister Kaoru Yosano said the country's big banks could get public funds if needed, as the government considered recasting a law aimed mainly at regional banks to speed the flow of finance to credit-starved small firms.

There were some signs the global efforts were paying dividends.

Interbank dollar, euro and sterling borrowing costs fell and spreads narrowed on Tuesday, giving further evidence that money markets -- the arteries of the global financial system -- continued to recover from the virtual paralysis following the demise of Lehman Brothers in mid-September.

(Reporting by Reuters bureaus around the world; Editing by Steve Orlofsky and Brian Moss)