By Mike Peacock
LONDON (Reuters) - Japan and Europe sought on Friday to prop up their faltering economies after a $14-billion rescue package for America's top auto makers collapsed, deepening the worst financial crisis in 80 years.
The U.S. bailout's failure in late-night Senate talks will raise fears of an industry collapse that would jeopardize many jobs. The companies say one in 10 U.S. jobs are tied to the auto sector, which adds up to several million.
Japanese Prime Minister Taro Aso scheduled a news conference for 4 a.m. EST. The Yomiuri newspaper reported he would expand economic stimulus measures to $437 billion to combat a deepening recession.
"We are working at a very high speed. The size of the economic measures will be worked out until the last minute," Finance Minister Shoichi Nakagawa told a news conference.
European Union leaders are set to back an already-floated 200-billion-euro ($264-billion) economic stimulus pact, a draft text from their Brussels summit showed, despite German misgivings.
Skeptics say the plan rests largely on national stimulus packages already announced by individual governments but leaders will be relieved nonetheless, after an unusually public spat between Berlin and London over Britain's value-added tax cut. In wording which appeared to reflect the reluctance of Germany, the text noted the possibility of reducing VAT on labor-intensive services only in those states that wished to.
A crisis which has spiraled from a U.S. housing collapse through frozen money markets to bank failures has now pushed much of the world into a recession which many experts say will be long and painful.
U.S. PLAN STALLED, STOCKS DIVE
The U.S. Senate's refusal overnight to back a rescue plan for the auto sector prompted stocks to dive.
General Motors Corp and Chrysler LLC had sought billions of dollars in immediate aid to avert collapse, while Ford Motor Co wanted a hefty line of credit.
"It's going to be a very, very bad Christmas for a lot of people based on what takes place here tonight," said U.S. Senate Majority Leader Harry Reid, a Democrat who favored the bailout.
"I dread looking at Wall Street tomorrow. It's not going to be a pretty sight."
Tokyo's Nikkei average and stocks elsewhere in Asia fell 5 percent and more after talks failed.
Auto stocks went into freefall, with Toyota Motor Corp, Nissan Motor Co and others extending earlier falls to more than 10 percent.
European shares shed 3.5 percent with BMW, Daimler, Renault, Fiat, Peugeot and Porsche down 1.7-6.9 percent.
The U.S. House of Representatives had agreed to the bailout but the Senate balked. The White House said it was weighing its options and described the failure of the talks as disappointing.
GM, Ford Motor Co. and Chrysler employ nearly 250,000 people directly, and 100,000 more jobs at parts suppliers could hang on their survival.
U.S. job losses hit a 34-year high in November and the unemployment rate reached a 15-year high.
BRAVE FACE FROM CHINA
Even once fast-growing China has not been able to avoid the wreckage of a crisis born of a U.S. housing market meltdown.
Beijing launched a 4-trillion yuan ($586-billion) stimulus plan on November 9 and followed up on Wednesday with a pledge after a strategy meeting to ramp up public spending and cut taxes.
Despite a string of data showing exports tumbling, domestic demand tumbling and deflation looming, senior officials voiced confidence that China can hit its 8 percent growth target in 2009 -- seen as the rate deemed necessary to create enough jobs for the millions of people joining the workforce each year.
Others disagree - the World Bank is forecasting 7.5 percent growth next year; Goldman Sachs expects a rate of just 6.0 percent. [nPEK84995]
Yomiuri did not cite any sources in its report of the stimulus package for Japan's recession-hit economy. Although details were sketchy, not all of the $437 billion -- about 10 percent of GDP -- was earmarked for spending.
Part of the money would be used to expand the amount of public funds set aside to pre-emptively recapitalize financial institutions to 12 trillion yen ($131 billion) from 2 trillion yen, the paper said.
Tokyo has already announced a package of economic measures worth 27 trillion yen ($295 billion), which included 5 trillion yen in new spending and featured payouts to families, tax breaks on mortgages and relief for small firms.
(Editing by Timothy Heritage)