By Emily Kaiser and Mike Peacock
WASHINGTON/LONDON (Reuters) - European leaders clashed on Monday over how much public money to spend on battling recession as data showed factories were slashing output in the United States, Europe and China.
The Bank of Japan called an emergency meeting for Tuesday to find ways to cut corporate borrowing costs. BOJ Governor Masaaki Shirakawa warned access to funding was becoming increasingly tough for Japanese firms, to an extent comparable with a debilitating credit crunch a decade ago.
In a sign of how drastically the deepening economic gloom was curbing demand, U.S. manufacturing activity in November fell to its weakest in 26 years. A similar reading on euro zone factories sank to a record low.
China's manufacturing sector also slumped in November as new orders tumbled, showing the world's fourth-largest economy was being sucked deeper into the global maelstrom.
The financial crisis that began with a U.S. housing market collapse last year has already knocked several big economies into recession, including the euro zone. Most economists believe the United States and Britain will soon follow.
Euro-zone finance ministers gathered in Brussels to flesh out the European Commission's 200 billion euro ($252 billion) plan to revive their economies, but Germany rejected calls to step up its stimulus spending.
The Commission proposed last week that European Union countries spend an extra 1.2 percent of GDP from their budgets, mainly in 2009, to boost investment and consumer demand.
"It's clear that we need to do something and it needs to be substantive," Dutch Finance Minister Wouter Bos said.
Agreement may prove elusive. German Chancellor Angela Merkel told her party on Monday the government, which has unveiled a 32 billion euro plan, would not go on a spending spree to please its neighbors.
"We will not take part in a competition to outdo one another with an endless list of new proposals, in a senseless contest over billions," Merkel said.
French President Nicolas Sarkozy criticized Merkel's lukewarm reaction last week, saying: "While France is working, Germany is thinking."
RATE CUTS COMING
Central banks in Britain, the euro zone, Australia and New Zealand are expected to cut borrowing costs sharply this week in response to the crisis.
U.S. Federal Reserve Chairman Ben Bernanke is due to give a speech later on Monday that may give clues on the direction of U.S. monetary policy.
Stocks slid, with investors caught between aggressive steps by central banks and ever weaker economic data.
U.S. stock indexes dropped more than 4 percent, dragging European shares deeper into negative territory.
Inflation in Thailand, South Korea and Australia plunged in November in synch with a global retreat, giving central banks room to slash interest rates further to soften the blow from the worst financial crisis since the 1930s.
Expectations for more rate cuts in Britain were underlined by the UK's PMI index showing manufacturing shrank at a record pace in November after a collapse in new orders.
Australia's central bank is expected to slash its benchmark rate by at least 75 basis points on Tuesday on top of 200 basis points of cuts since early September.
The European Central Bank and Bank of England deliver their verdicts on Thursday.
CONSUMERS CAUTIOUS
Hopes the consumer may ride to the rescue looked optimistic.
The U.S. post-Thanksgiving sales, which mark the traditional start to the holiday shopping season, looked less dire than feared but that did not stop investors from dumping shares in retailers. Analysts warned that while stores were crowded, the sales growth may have come at the expense of profits and overall demand remained weak.
"Regardless of retail sales, retail profits are another matter. Everything they sold was at a razor-thin margin," said Ellen Davis of the National Retail Federation.
Auto makers in Sweden, France, Spain, Japan and South Korea all reported tumbling sales, taking fresh hits from plunging consumer confidence on the world's car lots.
German retail sales rose slightly in October but with unemployment expected to rise, the outlook is cloudy.
Sales, including turnover at gas stations and cars, rose by 0.4 percent, Bundesbank data showed. A narrower measure showed a decline of 1.6 percent on the month.
(Additional reporting by Reuters bureaus worldwide; Editing by Tom Hals)
