By Omar Valdimarsson and Keith Weir
REYKJAVIK/LONDON (Reuters) - Iceland sought an emergency bailout from Russia on Tuesday and the Russians unveiled an aid package for their own banks in the latest piecemeal responses to the global financial crisis.
Australia responded to the growing crisis by cutting its interest rates by 100 basis points to 6.0 percent, putting pressure on Western central banks to cut the cost of borrowing.
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. People are worried about protecting their savings and keeping their jobs as some of the pillars of global finance give way.
Home to 300,000 people, Iceland used emergency powers adopted on Monday to dismiss the board of directors 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.
RATE CUTS?
Shares in some of Britain's biggest high street banks tumbled on news of funding talks with the government.
Royal Bank of Scotland was the biggest loser, with its shares down more than 30 percent to a 13-year low.
"The big banks and the chancellor met yesterday night. Recapitalization is one of the options being considered," a source familiar with the talks said. RBS later said it did not make a request for capital.
Shares in Europe and the United States suffered record falls on Monday on fears for the health of the financial sector.
The FTSEurofirst 300 index of European shares had regained around one percent by lunchtime on Tuesday, while U.S. shares were expected to make up some lost ground.
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 U.S. Federal Reserve was ready to move.
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.
European Central Bank Governing Council member Miguel Fernandez Ordonez said central banks should coordinate monetary policy to deal with the crisis.
"I think it is important to coordinate everything, now the problem is global," Ordonez, also governor of the Bank of Spain, told reporters, adding that it was difficult to find a European solution to the crisis.
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.
Fed fund futures have priced in a probability of a 75 basis-point cut by the U.S. central bank this month.
The Bank of England is expected to cut rates from 5.0 percent on Thursday and the European Central Bank last week flagged it too could lower its rates from 4.25 percent.
(Reporting by Reuters bureaus worldwide; Editing by Ralph Boulton)