By Jeremy Gaunt and Dominic Whiting
LONDON/HONG KONG (Reuters) - The world's economic powers faced huge pressure on Friday to devise drastic remedies to revive the banking system and end panic selling in global financial markets.
Finance ministers and central bankers from the Group of Seven nations meet in Washington against a backdrop of plunging shares after bank bailouts, liquidity injections and coordinated interest rate cuts failed to get funds flowing again.
In a bid to unfreeze bank lending, the U.S. government is weighing guaranteeing billions of dollars in bank debt and temporarily insuring all U.S. bank deposits, The Wall Street Journal reported.
European shares traded down around seven percent, having already lost more than 15 percent in the four days to Thursday's close. They were at their lowest level since 2003.
Japan's Nikkei tumbled nearly 10 percent, registering its biggest one-day drop since a 1987 crash and losing nearly a quarter of its value in a week.
"This is panic," said Takashi Ushio, head of investment strategy at Marusan Securities in Tokyo.
The crisis claimed its first Japanese financial institution -- unlisted Yamato Life Insurance Co., which had $2.7 billion debts. The government looked to prop up smaller banks.
Focus was on the G7 meeting later on Friday. Ministers and bankers face intense pressure to agree a coordinated response to restore faith in the global financial system.
"It's time for the 'kitchen sink' -- as in, throw everything there is at the problem and in such scale that the 'shock and awe' break the current cycle of fear," Charles Diebel, a rate strategist at Nomura," said in a note to clients.
CAPITAL INJECTION
A crisis which began with the collapse of the U.S. housing market has destroyed lenders from Wall Street to Iceland. Much of the industrialized world is on the brink or recession and people are scared about losing their savings and jobs.
The U.S. authorities last week approved a $700 billion bank bailout and central banks around the world cut interest rates in unison on Wednesday.
However, credit markets remain in deep distress. With banks desperate to protect capital, the interbank cost of borrowing dollars rocketed. Three-month interbank rates for dollar loans have hit their highest level of the year.
The U.S. Treasury plans to start injecting capital in U.S. banks as soon as this month, according to a financial policy source familiar with Treasury Secretary Henry Paulson's thinking.
That partial nationalization of American banks would represent an enlarged role for the U.S. government as the lender and investor of last resort.
U.S. policy had focused on a plan to buy banks' distressed assets. Many analysts say a move to shore up banks' capital would be a more direct way to break a logjam in credit markets that has shut down new borrowing for consumers and businesses.
British Prime Minister Gordon Brown said other governments should follow Britain in putting money into struggling banks and offering guarantees worth hundreds of billions to persuade banks to start lending to each other.
"Because this is a global problem, it requires a global solution," he wrote in The Times newspaper.
IMF OFFER
Late on Thursday, the International Monetary Fund said it was ready to lend to countries hit by the global credit crunch and had activated an emergency financing mechanism first used in the 1990s Asian crisis.
Elsewhere, South Korea's finance minister Kang Man-soo planned to plead with U.S. bankers for extended credit lines to save the country's banks from the ravages of the global crisis, while the won currency swung wildly for a second day.
Singapore said its export-dependent economy had sunk into its first recession in six years, and eased monetary policy. Neighboring Indonesia kept its stock market closed for a third day.
India injected more money into the banking system.
Stock markets, meanwhile, have been among the most obvious victims of the crisis.
U.S. stocks slumped more than 7 percent on Thursday and have now lost $2.3 trillion this week and $8.3 trillion over the past year, according to the Dow Jones Wilshire 500, the broadest measure of U.S. equities available.
Among the big losers was Morgan Stanley, which saw its shares plummet 25 percent on concern that Mitsubishi UFJ Financial Group, Japan's largest bank, was planning to pull out of a planned $9 billion investment.
Mitsubishi UFJ said it had no such plans, but the Morgan Stanley stock fall underlined the shakiness of financial stocks.
(Additional reporting by Reuters bureaus around the world; editing by Keith Weir)
