By Keith Weir and Daniel Trotta
UPDATE 1: US, China, Canada, ECB and national central banks in Europe in joint response to global financial crisis.
Central banks around the world cut interest rates in unison on Wednesday but the unprecedented move failed to help battered stocks, thaw credit markets or temper forecasts for a sharp global economic downturn.
US stocks closed down for a sixth straight session after heavy and volatile trade that saw gains fade in the final hour amid uncertainty about whether the lower interest rates would avert recession.
The S&P 500 index closed down 1 percent and has shed 15 percent this month. Wall Street's benchmark of fear, the Chicago Board Options Exchange Volatility Index, hit a record high as investors scrambled for cover.
Shares in Europe and Latin America posted deeper losses, extending a rout that has cost investors about $12 trillion over the past year, an amount equal to the entire value of the US mortgage market.
"We're sitting between the abyss, which is the unthinkable, which is the breakdown of the financial system, or a deep and sustained recession," said Kirby Daley, a strategist at Newedge Group.
Prices for oil and other commodities fell as investors rolled back to cash and gold - safe havens in fear-wracked markets.
The coordinated rate cuts were the latest salvo from financial policymakers in response to a crisis that has unsettled global investors, toppled banks in the United States and Europe and reshaped the US presidential election.
Shoring up the capital of European banks remained a priority for governments and investors.
Britain said it was prepared to inject 50 billion pounds ($87 billion) of taxpayer money into its banks.
Italy vowed that no Italian bank would collapse, and said it would offer public funds in return for non-voting shares where needed.
Iceland seized control of a second large bank, and abandoned support for its withering currency. Prime Minister Geir Haarde said Iceland had not asked for help from the International Monetary Fund, but said assistance from the IMF was "definitely an option" and separately said negotiations to secure a 4 billion euro ($5.45 billion) loan from Russia would begin next Tuesday.
Diplomatic sources said that senior ministers of France, Belgium and Luxembourg would meet in Brussels on Wednesday evening to discuss the future of financial group Dexia after its shares fell another 15.4 percent and its credit rating was downgraded by Standard & Poor's for the second time in a week.
The US Federal Reserve cut its federal funds target rate by half a percentage point to 1.5 percent, and China, the European Central Bank and central banks in Britain, Canada, Sweden and Switzerland followed suit.
The coordinated cuts included China for the first time. The Bank of Japan said it saw no need to cut Japanese interest rates but that it strongly supported the coordinated action.
Earlier, Hong Kong slashed its main interest rate by a full percentage point to match a similar cut by Australia a day earlier.
"The central banks of the world finally woke up to the gravity of the current situation," said Charles Diebel, head of interest rates strategy at Nomura. "This is a major step in convincing the world that they are serious about stabilizing."
Stocks had remained under pressure even after the United States approved a $700 billion rescue plan to buy distressed debt from financial institutions so they can clean up their balance sheets and start lending again.
US credit markets still showed signs of distress.
A widely watched spread between interbank lending rates and 3-month US Treasury bills, seen as a proxy for the risk appetite of banks, blew out to its widest range in at least a decade before easing back in afternoon trade.
The move underscored intense underlying concern about the global banking system even after the interest rate cuts.
US Treasury Secretary Henry Paulson urged stepped-up international cooperation ahead of Friday's gathering in Washington of finance ministers and central bankers from the Group of Seven: the United States, Canada, Germany, Britain, Italy, France and Japan.
But he also warned that the turmoil "will not end quickly" and said it might be several weeks before the Treasury begins buying up bad debt from banks.
"I'm looking to take all the steps that we need to take to stabilize the financial system," Paulson said.
The International Monetary Fund issued its bleakest forecast in years, saying the world economy was set for a major downturn with the United States and Europe either in or on the brink of recession.
Already there were signs that the worst financial crisis since the 1930s was becoming a stark reality for millions around the world.
"I'm scared, really scared," said Cathy Ivcich, 45, a Chicago real estate agent. "People have stopped buying houses. I've got a lot of buyers who have secure jobs or who have money, and I'm sure I could get them a loan. But they're just scared."
US retailers reported disappointing September sales just days after the United States reported losing 159,000 jobs in September, running the year's total to 760,000.
Industry tracking firm Global Insight predicted US auto sales would fall further in 2009 from the 15-year lows the market has hit this year. General Motors shares fell to their lowest since 1952.
The equity sell-off has destroyed some $4.6 trillion of global stock market wealth in the past three weeks alone, according to the market capitalization loss on MSCI's main world equity index. Over the last 12 months, the figure is more than $12 trillion.
The economy has taken center stage in the US presidential campaign less than a month before the Nov. 4 election. Republican John McCain and Democrat Barack Obama welcomed the global rate cut.
McCain promised to buy mortgages from homeowners facing financial problems to help them refinance in a bid to win back a lead in the polls Obama has built on economic issues. McCain's campaign said the program would cost roughly $300 billion.
The Obama campaign dismissed the idea as "more costly and out-of-touch than we ever imagined" and noted the Treasury already had authority under a $700 billion rescue plan approved by Congress to buy up distressed debt. (Reuters)