By Daniel Trotta
NEW YORK (Reuters) - The Fed emerged as a commercial lender of last resort on Tuesday as nations around the world scrambled one by one to slow the global financial crisis despite calls for concerted action.
The Federal Reserve created a new commercial paper facility that would buy short-term, highly rated debt, stepping into the corporate debt market for the first time in a program that falls outside the $700 billion rescue plan approved by Congress on Friday.
That followed a day in which Russia negotiated an emergency bailout for Iceland and unveiled an aid package for its own banks, Australia slashed interest rates by 1 percent to 6 percent, and Britain considered a massive injection of public funds.
Iceland, the tiny North Atlantic island that has punched far above its weight in financial terms as its banks expanded overseas, also took over its second-largest bank and propped up a battered currency.
The piecemeal efforts continued while the pillars of global finance buckled under the weight of the credit crunch as jobs disappeared, retirement accounts withered and policy-makers were running out of bazookas to combat the crisis.
The International Monetary Fund increased its estimate of global losses from the financial meltdown to $1.4 trillion and warned the economic downturn was deepening.
"The financial planet is in total crisis," European Central Bank Governing Council member Guy Quaden said, capturing a mood of disarray in governments and markets alike as central banks and finance ministries faced pressure to increase liquidity.
Federal Reserve Chairman Ben Bernanke was due to make a speech around 1:15 p.m. EDT on the economic outlook and financial markets. One driver of the economy -- interbank lending -- remained stalled with the cost of borrowing dollars, euros and sterling all higher.
Japan called for greater coordination but signaled it would not cut rates. China's banking regulator denied that Beijing might ride to America's financial rescue and a leading Chinese state newspaper said the world should avoid paying for the United States' mistakes.
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.
World Bank President Robert Zoellick called the G7 ineffective and said it should be replaced by a group that includes emerging economic powers like China, India and Brazil.
In Luxembourg, EU finance ministers agreed to increase the minimum level of bank deposit insurance across the 27 European Union countries.
European Commission President Jose Manuel Barroso warned that a succession of national responses by EU countries may lead to a "renationalization" of the financial system, reflecting concern that member states are ignoring EU rules in their haste to react to market turmoil.
CAMPAIGN TURNS NASTY
Investors eagerly awaited progress on the $700 billion U.S. bailout but were uncertain it would be enough to contain America's home-grown mess, built on frenzied mortgage lending and trading in unregulated derivatives.
Voters looking to the U.S. presidential candidates for answers four weeks from election day instead have been hit by an increasingly nasty campaign.
The stock market extended losses despite the Fed's move, an indication that risk-taking was still not an option for investors.
But a rebound in Treasury bill rates indicated some money managers were at least willing to part with hard cash for short periods of time.
The Dow opened higher after news of the Fed's commercial paper facility, briefly climbing back above 10,000 points, but trended lower in volatile trade after a see-saw ride on world markets.
The Dow was down 25 percent year-to-date and 12.6 percent over 11 sessions following Monday's meltdown, which at one point included a 800-point nosedive, the biggest intra-day decline.
If that were not enough, a raft of major corporate earnings reports were due in the United States that could reinforce expectations of economic contraction.
Analysts expect overall S&P 500 company earnings to fall 4.8 percent in the third quarter, down from an estimate of 12.6 percent growth as recently as July 1, according to Thomson Reuters proprietary data.
Alcoa Inc was due to report after the markets close on Tuesday and General Electric on Friday in its first report since super investor Warren Buffett came to the rescue last week with a $3 billion investment.
Bank of America Corp, in a surprise earnings announcement after the markets closed on Monday, halved its dividend and said it would sell at least $10 billion in new common stock to raise capital and offset loan losses. Its shares were off 17 percent at midday.
The bank, which has taken over mortgage lender Countrywide and investment bank Merrill Lynch this year, cited "recessionary conditions" in reporting a 68 percent slide in quarterly earnings.
(Reporting by Reuters bureaus around the world; Editing by Brian Moss and Steve Orlofsky)
