By Mike Peacock
LONDON (Reuters) - Britain's economy shrank, China said the outlook was grim and companies from Japan to France were punished on Friday as a downturn born of the worst financial crisis in 80 years took root.
Separate figures from the euro zone showed the 15-nation currency bloc was already in recession, analysts said.
Markets nosedived.
European shares shed 7 percent after stocks in Japan had dropped almost 10 percent to their lowest point in 5-1/2 years.
"The global financial crisis has been constantly spreading and worsening, creating a severe shock to global economic growth," Chinese Premier Wen Jiabao told an Asia-Europe Meeting of 27 European Union member states and 16 Asian nations.
Britain's economy shrunk 0.5 percent in the third quarter, more sharply then forecast, after registering no growth in the second, official data showed.
Bank of England policymaker Andrew Sentance said the risk of a severe UK recession had risen. "Hopefully we can avoid that sort of situation in the current circumstances, but the risks of that have increased," he told BBC Radio.
Compounding the gloom, a survey of companies showed the euro zone private sector economy was on track for its worst performance since the recession of the early 1990s.
The October Markit Eurozone Flash Purchasing Managers' Indexes show services business contracting at its fastest pace since collapsing after the September 11, 2001 attacks. Factory output was contracting at its fastest pace in at least a decade.
"This is it, we are clearly into recession," said Gilles Moec, economist at Bank of America.
A range of corporate giants reeled too, not just the banks who were hit first and hardest by a financial crisis that began with a U.S. housing market collapse and now threatens recession across much of the globe.
Sony's shares tumbled 13 percent to a 13-year low after it halved its profit forecast because the fallout of the financial crisis hit demand for its cameras and flat TVs.
French carmaker PSA Peugeot Citroen cut its full-year operating margin target on Friday and said it planned to make "massive" production cuts in the fourth quarter after posting a 5.2 percent fall in third quarter sales.
And world number two truck maker Volvo posted a surprise fall in third-quarter pretax earnings.
CHINESE CALL TO ARMS
Authorities around the world have committed nearly $4 trillion in a variety of schemes including deposit and debt guarantees and taking stakes in struggling banks, to restore confidence to the financial system.
Seven French banks took advantage, requesting a total of 5 billion euros ($6.4 billion) in loans from a state refinancing vehicle, the refinancing body's chief said on Friday.
In Washington, the Treasury Department and bank regulators plan to announce as soon as this weekend the next batch of banks receiving capital injections as part of its bank bailout package, a source familiar with the Treasury's thinking said.
European leaders wants China, the world's fastest-growing major economy, to help shape global financial reforms.
"There was large agreement that such answers must be found internationally," German Chancellor Angela Merkel said after talks with Chinese President Hu Jintao in Beijing. "I think China will make its contribution to the stabilization of the world economy."
Hu had earlier said the outlook was "grim and complicated."
Leaders of the world's major industrial nations and other big economies will discuss the crisis at a special summit on November 15 in the United States.
Chinese spokesman Liu Jianchao said his government was "actively considering" attending the summit.
The ASEAN group of Southeast Asian states agreed with Japan, China and South Korea to upgrade an $80 billion web of currency swap lines among central banks, to allow a country plunging into a currency crisis to rapidly call up financial firepower.
IMF POISED
The International Monetary Fund is hurrying to approve by early November a package allowing certain emerging economies exchange their currencies for U.S. dollars to ease short-term credit strains, officials familiar with the plans said.
The so-called liquidity swap facility would be available to a group of pre-selected "top tier" emerging market countries -- those that are well-run but may be having difficulties obtaining credit, the officials told Reuters.
So far, Hungary, Iceland, Belarus, Ukraine and Serbia are in talks with the IMF on economic programmes backed by financing.
Interbank lending, which froze for much of the last year as banks hoarded cash fearing peers might collapse, has shown tentative signs of thawing following cash injections, bank bailouts and interest rate cuts worldwide.
In London, interbank rates for overnight dollar deposits were indicated in a range of 0.25-1.00 percent, having peaked around 10 percent after September's collapse of Lehman Brothers.
Markets expect the Federal Reserve to cut U.S. interest rates aggressively next week to help head off a sharp recession.
(Reporting by Reuters bureaus worldwide; editing by Keith Weir)
