WORLD FINANCIAL leaders meeting in Washington have pledged to use "all available tools" to prevent the failure of any systemically important financial institutions.
Finance ministers from the G7 group of leading industrial nations said they would take steps to ensure that banks can raise capital from "public as well as private sources" in sufficient amounts to re-establish confidence in their business.
As escalating turmoil in the financial system led global stock markets to some of their worst losses for decades, the Bush administration last night took steps to expand radically its interventions in the free market.
In an attempt to shore up the financial system, the US government will start buying shares in a "broad array" of American banks. This latest manoeuvre comes after emergency interest rate cuts on Wednesday by the Federal Reserve, the European Central Bank and other central banks failed to calm markets.
After big declines in stock markets throughout Europe and Asia, the US Standard Poor's 500 Index capped its worst week since 1933 to finish 1.2 per cent weaker last night.
Such volatility reflects the view that the US government's $700 billion "bailout" programme to buy up distressed mortgage assets from vulnerable banks does not go far enough to relieve exceptional pressure on the international money markets.
Share purchases in banks will take place alongside the bailout programme. The US government will not be involved in bank management, treasury secretary Hank Paulson said. "Such a programme would be designed to encourage the raising of new private capital to complement public capital."
Finance ministers and central bankers from US, Japan, Germany, Britain, France, Canada and Italy pledged in a joint statement to take "all necessary steps" to unfreeze credit and money markets.
"We commit to continue working together to stabilise financial markets and restore the flow of credit, to support global economic growth," they said in a joint statement.
Earlier, President George W Bush sought to soothe fears of a protracted global recession by reiterating his government's determination to take whatever action is required to stem the turbulence. "We know what the problems are, we have the tools we need to fix them, and we're working swiftly to do so," Mr Bush said.
Stock market investors are looking to this weekend's annual meeting of the International Monetary Fund and the G7 meeting for signs that the international community will adopt a harmonised approach.
There was confusion yesterday when Silvio Berlusconi, the Italian prime minister, said world leaders were examining the possibility of closing down financial markets.
Less than an hour later he retracted the statement. "The hypothesis wasn't put forward by any leader, including myself," Mr Berlusconi said. "I heard it on the radio."
Editorial comment: page 15
Reports and analysis: pages 16-17