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 gathered in Washington ahead of a weekend meeting, in search of 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 tumbled at the open but quickly recovered. The Dow lost nearly 700 points and fell more than 8 percent in the opening minutes, then turned positive half an hour after the opening bell. Like the S&P 500, the Dow was flat. The Nasdaq was up 1 percent.
That came after the Dow fell 679 points, or 7.3 percent, on Thursday, extending its losses over six trading sessions to 20 percent.
It was part of global evisceration of wealth that has affected investment bankers and retirees alike. Going into the trading day, stocks on MSCI's main worldwide index had lost $14.3 trillion of value since October 31, 2007, leaving the global equity benchmark worth less than $20 trillion for the first time in four years.
The MSCI has lost nearly $4.6 trillion in value in the previous seven days alone.
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 sank 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 might back out of a deal to inject much-needed capital.
The stock was down 12 percent in early trade.
"It's not just Morgan Stanley. I predicted that if Lehman went down it would be disastrous, and it has been. Lehman has caused fear that financial institutions can go down, so there's a tremendous lack of confidence in the system," said Marino Marin, managing director and banker at Gruppo, Levey & Co.
"The U.S. government should emulate Italy, the UK and Ireland and others and back the banks. Immediate U.S. government action is paramount -- not just announcements, but action," he said.
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.
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.
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)
