By Patricia Zengerle
WASHINGTON (Reuters) - Credit markets showed signs of thawing and Federal Reserve Chairman Ben Bernanke backed more government spending on Monday, prompting renewed hope that the worst of the financial crisis may be over.
A critical measure of lending between banks, the three-month Libor rate, fell the most in a single day since January in a sign that banks were regaining some confidence in dealing with each other.
Most major stock markets climbed, with U.S. stocks outpacing gains in Europe and Japan on signs that credit strains were easing and after Bernanke's comment that another wave of government spending may be needed as the economy limps through what could be an extended period of subpar growth.
Led by energy, utilities and materials companies, and with some bargain hunting, the Dow closed up 4.7 percent and the broader S&P finished up 4.8 percent. It was the U.S. stock market's second jump in the past three sessions, and the U.S. dollar also rebounded.
"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," Bernanke told Congress in his first endorsement of a second U.S. stimulus package.
The White House said it was open to a stimulus plan.
The U.S. Treasury began taking applications from U.S. banks interested in tapping into the remaining $125 billion in the government equity infusion program, and made it clear it wants new capital loaned out, not hoarded.
"This is an investment, not an expenditure, and there is no reason to expect this program will cost taxpayers anything," Treasury Secretary Henry Paulson said.
INTERNATIONAL EFFORTS ABOUND
Other governments were drawing up their own plans.
Canadian Finance Minister Jim Flaherty was set to announce measures this week to help domestic banks keep up with foreign competitors benefiting from government bailouts and guarantees.
French President Nicolas Sarkozy might speed rail projects and help car manufacturers, France's Le Monde newspaper said. Sarkozy could also announce measures this week to fight rising unemployment.
The Bundesbank said Germany's economy probably stagnated in the third quarter. Berlin is considering measures to stimulate investment in specific sectors, a government spokesman said.
The Financial Times said Britain was planning to fast-track billions of pounds for building projects, and Iceland was due to receive a $6 billion IMF-led rescue package soon.
ING grabbed a 10 billion euro ($13.5 billion) Dutch cash injection, and Sweden joined countries offering lifelines to banks.
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 four-year low near the Fed's target rate of 1.5 percent
And for the first time since mid-February, the average U.S. retail gasoline price dropped to below $3 a gallon to its lowest level in almost a year. Falling gas prices act like a tax cut for consumers, shaving about $30 off the fill-up cost for the average large vehicle from the record $4.11 a gallon for gasoline in July.
A BREAK IN THE STORM
Monday's comparative optimism followed weeks of market-rattling news since Lehman Brothers collapsed in mid-September.
The United Nations' International Labor Organization said on Monday 20 million jobs will disappear by the end of 2009 because of the financial crisis, the worst 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.
"The improvement was glacial last week and appears to be accelerating this week," said Charlie Smith, chief investment officer of Fort Pitt Capital Group in Greentree, Pennsylvania.
"When you are cranking that much money into the system, if you hadn't seen some improvement, the concerns would be gargantuan."
The crisis has been felt in the U.S. presidential campaign, with Democrat Barack Obama expanding his national lead over Republican John McCain in the latest Reuters/C-SPAN/Zogby poll.
Fear and anger about the economy may cost the Republicans on November 4, with the Democrats in a position to take a commanding 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 eased economic growth in the third quarter and forecast a further slowing in the fourth. 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 came as American Express, the fourth-largest U.S. credit-card issuer, reported a 23 percent decline in its third-quarter income from continuing operations as it set aside more money to cover credit losses.
Investors had looked to AmEx for indications of whether wealthier people were cutting back on spending or falling behind on payments. The company said delinquencies on its cards had crept higher as the financial crisis weighed on some consumers' ability to pay their bills.
(Additional reporting by Reuters bureaus worldwide; Editing by Steve Orlofsky and Toni Reinhold)
