By Daniel Trotta
NEW YORK (Reuters) - Interbank lending emerged from deep freeze, and European and U.S. officials moved closer to infusing their economies with new stimulus packages on Monday, providing hope the world's financial crisis may be easing.
The three-month Libor rate fell the most in a single day since January in one sign that banks may have the confidence to lend to each other again, crucial to reactivating the world economy.
The chairman of the U.S. Federal Reserve told Congress on Monday that another wave of government spending may be needed as the economy limps through what could be an extended period of subpar growth.
Bernanke also said he was encouraged by improvement in credit conditions but that it was too soon to draw conclusions.
"With the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate," Fed chief Ben Bernanke said in his first endorsement of a second U.S. stimulus package.
That followed reports that European powers were drawing up their own plans.
British Finance Minister Alistair Darling told the Sunday Telegraph that Britain will need to borrow more to fund the public spending needed to fend off the worst of the downturn. The Financial Times said Britain was planning to fast-track billions of pounds for building projects.
French President Nicolas Sarkozy might speed up rail projects and help car manufacturers, France's Le Monde newspaper said on Monday. Sarkozy could also reveal measures to fight rising unemployment this week.
Germany is looking at measures to stimulate investment in specific sectors, a government spokesman said.
U.S. stocks rose on the prospect of a government boost to taxpayers similar to one last summer when the Treasury sent out $100 billion of checks to jump-start the economy. The White House said it was open to a stimulus plan and would look to Bernanke for guidance.
The Dow and the S&P rose more than 2 percent each, and the U.S. dollar rebounded.
Global interbank rates fell sharply including those of Libor, the benchmark rate at which banks lend to each other. Other measures of credit stress eased to levels not seen in more than a month. Libor for overnight dollars fell to a 4-year low near the Fed's target rate of 1.5 percent
European stocks closed nearly 4 percent higher and fared well as banks on the continent prepared to make use of state rescue packages.
ING grabbed a 10 billion euro ($13.5 billion) Dutch cash injection, Sweden joined countries offering lifelines to their banks and scrutiny of capital health switched to Societe Generale and its French peers.
A BREAK FROM BLEAK NEWS
Monday's comparative optimism follows weeks of market-rattling weekend announcements since Lehman Brothers collapsed in mid-September.
The world's financial stewards have used previous weekends to announce emergency measures to combat the worst financial crisis since the 1930s Great Depression.
Governments have promised $3.3 trillion -- about equal to the economic output of Germany -- to guarantee bank deposits and bank-to-bank lending, and in some cases have taken stakes in banks with toxic assets.
"There's a perception that the crisis squeeze could be beginning to abate thanks to measures from global authorities over the past few weeks," said Philip Shaw, chief economist at banking group Investec.
The crisis has been felt in the U.S. presidential campaign, where Democrat Barack Obama has expanded his national lead over Republican John McCain in the latest Reuters/C-SPAN/Zogby poll.
Fear and anger about the U.S. economy may cost the Republicans in the November 4 vote with the Democrats in a position to take a commanding a 60-seat majority in the 100-member U.S. Senate for the first time 30 years.
In Asia, South Korea announced a $130 billion rescue package, and China reported that economic growth eased in the third quarter and forecast a further slowing in the fourth quarter.
Chinese conglomerate CITIC Pacific added to the global turmoil, warning of potential foreign exchange losses of nearly $2 billion and accusing its senior finance director of trading without approval.
Other major economies also showed signs of a slowdown. The Bundesbank said Germany's economy probably stagnated in the third quarter.
In India, the central bank unexpectedly cut its key lending rate for the first time in more than four years.
One indicator of how the crisis is affecting the real economy will come later on Monday when American Express, the fourth-largest U.S. credit-card issuer, reports earnings, probably before the closing bell.
Because American Express has a well-to-do clientele, investors are looking for indications that higher income people are cutting back on spending or falling behind on payments.
(Additional reporting by Reuters bureaus worldwide; Editing by Brian Moss and Steve Orlofsky)
