Markets cheer as Europe bails out banks

NEW YORK (Reuters) - The world's financial stewards bet solidly on recapitalizing ailing banks as the fastest way out of the financial crisis in a clear new direction on Monday that reinvigorated stock markets after their worst week in history.

U.S. stocks shot up 6 percent in early trading after the Dow tumbled 18 percent last week amid a climate of panic and uncertainty as credit markets seized up and major economies headed toward recession.

"Sometime last week it seemed like we faced Armageddon, so to have a coordinated plan on stabilizing banks is huge progress," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

Wall Street also focused on investment bank Morgan Stanley, which reached a financing deal with Mitsubishi UFJ Financial Group Inc (MUFG), possibly with U.S. government support. Morgan shares regained virtually all the 58 percent lost week.

In addition, the U.S. Federal Reserve, the European Central Bank, the Bank of England and the Swiss National Bank said they would lend commercial banks as much U.S. dollar liquidity they needed.

That had an instant impact on bank-to-bank lending rates, which eased as the interbank cost of borrowing in dollars, sterling and euros all fell.

For weeks the United States concentrated on a $700 billion rescue plan that emphasized buying up distressed debt from financial institutions. However, British Prime Minister Gordon Brown has shifted the world's attention to the other side the balance sheet by proposing to inject new capital into banks to get them lending again.

The U.S. Treasury and Federal Reserve were working to finalize details of their own plan to recapitalize banks and stabilize financial markets in the wake of the measures announced in Europe.

Brown, who has yet to win a mandate from British voters but whose global profile has risen amid the crisis, also called on world leaders to create a new "financial architecture" to update the current international economic system, which was set up at a conference in Bretton Woods, New Hampshire, in 1944.

"Sometimes it does take a crisis for people to agree that what is obvious and should have been done years ago can no longer be postponed.," Brown said in a speech at the London offices of Thomson Reuters.

INTERBANK RATE FALL

Britain's bank plan called for 37 billion pounds ($64 billion) of taxpayers' cash to bail out three major banks in a move that would likely make the government their main shareholder.

Germany, France, Italy and other European governments also announced rescue packages totaling hundreds of billions of dollars that were designed to combat the banking crisis, the worst since the Great Depression.

The moves calmed markets as well as the new Nobel laureate for economics, Princeton University economist Paul Krugman.

"I'm slightly less terrified today than I was on Friday," Krugman said. "We're going to have a recession and perhaps a prolonged one but perhaps not a collapse."

U.S. Treasury Secretary Henry Paulson at first resisted U.S. government ownership of banks but has moved along with other major powers, who were in Washington over weekend for meetings of the Group of Seven major economies, the International Monetary Fund and the World Bank.

Japan said on Monday it was considering whether to guarantee all bank deposits, while the central bank said it might join further global efforts to boost dollar funding to strained money markets.

The two men vying to succeed U.S. President George W. Bush after the November 4 election were formulating their own plans.

Democrat Barack Obama, leading in public opinion polls, was due to give a major speech outlining his economic rescue plan at 1:30 p.m. EDT (1730 GMT) on Monday, while Republican John McCain was considering rolling out a new, comprehensive economic package.

($1=.5786 Pound)

($1=.7287 Euro)

(Reporting by Reuters bureaus around the world; editing by Steve Orlofsky)