By Daniel Trotta and Kevin Krolicki
NEW YORK/WASHINGTON (Reuters) - Governments around the world grasped at new measures to contain the fast-spreading credit crisis on Monday but stock, bond and commodity markets saw investors betting on deepening uncertainty and a sharp global downturn.
U.S. officials called for a "forceful and coordinated" global reaction to the crisis as the Dow Jones industrials average fell 4.4 percent, below 10,000 for the first time in four years.
The S&P 500 fell 4.9 percent to a five-year low. The Nasdaq dropped 5.1 percent in the first Wall Street session since the U.S. Congress approved a $700 billion bailout intended to reassure markets that help was on the way.
Instead, a crisis that began with the overheated U.S. property market and the $11 trillion U.S. mortgage market showed signs of rocking investor confidence worldwide more violently.
"The ground underneath our feet is moving like an earthquake," said acting U.S. Treasury Undersecretary for domestic finance Anthony Ryan.
Expectations were building for a rate cut by the U.S. Federal Reserve, possibly as part of coordinated action with the European Central Bank. European financial policymakers have faced criticism for a fragmented response to the crisis.
Fed fund futures have priced in a probability of a 75-basis-point cut by the U.S. central bank this month.
The Treasury, charged with putting the $700 billion fund to work to buy up bad debt, named Neel Kashkari, a veteran banker from Goldman Sachs, to head the landmark program.
Ryan said the Treasury had not ruled out buying shares in companies. "There's a lot of flexibility in the legislation," he said.
Meanwhile, the New York Federal Reserve moved toward establishing a central clearing mechanism for credit default swaps -- a form of over-the-counter insurance against bankruptcy blamed by critics for destabilizing the entire financial system.
An index of U.S. stock option volatility seen as Wall Street's fear barometer surged more than 28 percent to a record high.
Emerging markets, which had gained most from the surging global expansion in the last three years, were sucked into the vortex. Trading was halted in markets as far afield as Brazil and Russia when stocks plunged.
Mexico's peso sank on Monday to its weakest level since the currency was allowed to float in the mid-1990s, and stocks plunged.
"This is a stampede," said Valerie Plagnol, chief strategist at CM-CIC Securities in Paris.
French President Nicolas Sarkozy issued a statement from the 27 member states of the European Union saying individual governments would do all they could to safeguard the financial system. Analysts remained pessimistic European powers could stop the contagion.
The banking upheaval that began on Wall Street has effectively shut down interbank and other loan markets, pushing industrialized countries closer to recession. Conditions remained poor for interbank lending.
Even as Sweden, Austria and Denmark followed Germany's lead by offering blanket deposit guarantees to savers, investors from Tokyo to London continued to slash risk and positioned themselves for a further tightening of credit.
South Korea said it wanted crisis talks with Japan and China, and Gulf equities crumbled under concerns the fallout would strike the region.
Lost in the avalanche of bad news was the continued drop in the price of oil, which fell below $90 a barrel. Oil prices have now dropped near 40 percent from their peak, pushed lower along with other commodity prices by worries about a looming economic recession.
With the U.S. presidential election less than a month away, the campaign remained overshadowed by the debate about how the country would confront the worst banking crisis since the Great Depression.
"WE DON'T WANT TO RUSH"
In Texas, U.S. President George W. Bush said it would take time to restore confidence in the financial system and free up credit, telling reporters it was important that the rescue program not waste taxpayer money.
"We don't want to rush into this situation and not have the program be effective," Bush said.
Campaigning in North Carolina, Democrat Barack Obama urged the Bush administration to act quickly. "We've seen that contagion is spreading to all parts of the globe," he told reporters.
On Capitol Hill, lawmakers pressed for an accounting of who was responsible for the financial train wreck.
The disgraced head of Lehman Brothers Holdings Inc told Congress that U.S. banking regulators knew exactly how the failed bank was pricing its distressed assets and about its liquidity in the months before its collapse.
"None of us ever get the opportunity to turn back the clock," Lehman CEO Richard Fuld told a panel of lawmakers who grilled him about the failure of his bank and his pay package. "But with the benefit of hindsight, would I have done things differently? Yes, I would."
In Chicago, former U.S. Securities and Exchange Commission chief Richard Breeden called the crisis "a 900-foot tsunami" and chided Treasury Secretary Henry Paulson for wanting, as recently as a year ago, to reduce regulation.
MORE BANK DEALS
Deals to shore up the capital of banks seen at risk dominated a weekend of frenzied deal-making in Europe.
France's BNP Paribas agreed to scoop up assets in Belgium and Luxembourg of banking and insurance group Fortis for 14.5 billion euros ($20.1 billion) to become the euro zone's biggest deposit bank.
German officials brokered a revised rescue deal for lender Hypo Real Estate that will provide extra billions of euros of liquidity.
Italy's second-largest bank, UniCredit, blamed a unprecedented market turmoil for an emergency decision to boost capital by 6.6 billion euros.
In the United States, banking regulators were working to conclude a compromise deal as soon as Monday that would resolve the rival bids from Citigroup Inc and Wells Fargo & Co for hobbled U.S. bank Wachovia Corp.
(Reporting by Reuters bureaus worldwide; Editing by Brian Moss and Steve Orlofsky)
