By James Mackenzie and Daniel Trotta
WASHINGTON/NEW YORK (Reuters) - Leaders of the world's leading economies confronted a financial system in shambles on Friday as they gathered in Washington with panic selling in the stock markets, credit frozen solid and the world teetering on recession.
Finance ministers and central bankers from the Group of Seven meet in Washington, searching for answers after joint interest-rate cuts, liquidity injections, a $700 billion bailout and government plans to take equity stakes in banks failed to restore investor confidence.
U.S. President George W. Bush was due to speak on the economy at 10:25 a.m. EDT, and French President Nicolas Sarkozy may launch a new European Union plan to try to deal with the crisis, a government official said.
Wall Street appeared to have no bottom. The Dow and the S&P 500 tumbled more than 7 percent in the first minutes of trade.
That came after the Dow fell 679 points, or 7.3 percent, on Thursday, extending its losses over six trading sessions to 20 percent.
Underlying the stock market sell-off was the disarray in the credit markets. Rates for three-month interbank dollar loans -- what banks charge each other to borrow -- rose again on Friday. Overnight rates also jumped.
Japan's Nikkei tumbled 9.6 percent, while in Europe major indexes traded down more than 8 percent.
Bourses in Iceland, Russia, Austria, Indonesia, Romania and Ukraine all closed as a result of the share price falls.
"The panic and the fear we're seeing is mind blowing. It looks like the market is pricing in a depression," said Matt McCall, president of Penn Financial Group in Ridgewood, New Jersey. "There's a lack of confidence in not only the global economy but in the leaders as well."
British investment firm F&C said the G7 meeting could be of "truly monumental importance."
The larger Group of 20, the International Monetary Fund and the World Bank also were due for weekend meetings amid a global thirst for leadership.
Bush is a lame duck ahead of the November 4 presidential election with the two men competing to succeed him, Republican John McCain and Democrat Barack Obama, bickering over how to resurrect the economy.
Morgan Stanley came into the spotlight after investors appeared unconvinced about its deal with Japan's Mitsubishi UFJ. Morgan Stanley shares have lost nearly half their value in the last three days on worries Mitsubishi UFJ may back out of a deal to inject much-needed capital.
Underlining the impact of the crisis, General Electric Co reported a 22 percent drop in third-quarter net income, with the global crunch hurting its hefty GE Capital arm. [nN10172352]
In a bid to unfreeze bank lending, the U.S. government is weighing guaranteeing billions of dollars of bank debt and temporarily insuring all U.S. bank deposits, The Wall Street Journal reported on Friday.
Apart from Wednesday's joint rate cut by the world's leading central banks, countries have been acting one by one .
In the latest unilateral action, Spain on Friday said it would buy up to 30 billion euros ($41.2 billion) of investment-grade bank debt in the fourth quarter, and a further 20 billion euros of bank debt in 2009 to boost financial sector liquidity and kick-start lending.
"This is about financing because markets are basically closed at the moment, this has nothing to do with a bailout," Economy Secretary David Vegara told reporters.
The U.S. Treasury plans to start injecting capital into 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 under the $700 billion rescue plan. 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 closed off 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.
The International Monetary Fund said on Thursday it was ready to lend to countries hit by the credit crunch and activated an emergency financing mechanism first used in the 1990s Asian crisis.
(Additional reporting by Reuters bureaus around the world; editing by Keith Weir and Steve Orlofsky)
