Asian stocks tumbled after a devastating day on Wall Street and Hong Kong became the latest economy to slash interest rates as pressure grew for a coordinated, global response to the biggest financial crisis since the Great Depression.
Shares in Tokyo and elsewhere in Asia fell about 5 percent as fear turned to dread that the global economy will be crippled by the spreading meltdown in financial markets.
Britain's finance minister, Alistair Darling, was set to announce a rescue package for the country's banking system that was likely to include a major injection of capital at around 0600 GMT on Wednesday, a government source told Reuters.
Kirby Daley, senior strategist at Newedge Group in Hong Kong, said central banks should act in a concerted effort to back the interbank lending market, which has all-but frozen. He called the U.S. Federal Reserve's move on Tuesday to buy commercial paper a good first step, but said the outlook remains grim.
"We're sitting between the abyss, which is the unthinkable, which is the breakdown of the financial system, or a deep and sustained recession, that will cause lower equity valuations to persist for the next 12 to 18 months," he said.
Hong Kong unveiled a 100 basis point cut in its interest rate on Wednesday, a day after a similar move by Australia that was the country's steepest cut in 16 years.
"The primary thing the market is focused on is getting some sort of coordinated bailout plan done across Europe, possibly involving Japan and the U.S. Until we get that, the market's going to remain pretty nervy," said Andrew Quin, research strategy coordinator for Paterson Securities in Perth, Australia.
On Tuesday, the U.S. Federal Reserve stepped forward as a commercial lender of last resort, launching a new facility to buy short-term, highly rated corporate debt, and signaled a readiness to cut interest rates, while European Union finance ministers agreed to increase the minimum level of bank deposit insurance.
U.S. Federal Reserve Chairman Ben Bernanke said the U.S. economy was being battered by a financial crisis of "historic dimension" and that the risk for inflation has eased with the falling prices for oil and other commodities.
Meanwhile, Commonwealth Bank of Australia agreed to buy British bank HBOS's Australian unit BankWest for A$2.1 billion ($1.5 billion), below book value, to boost its market share in fast-growing Western Australia.
The sale comes after HBOS's shares slid 40 percent on Tuesday, leading a broad-based sell-off in British banks, as the UK government prepared to announce a rescue package for its crippled financial sector.
Capital continued to flee from South Korea, sending the won down 4.2 percent to its lowest level since the Asian financial crisis a decade ago.
"The deteriorating outlook for the economy and the deepening financial crisis are pushing fears to their limit," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management.
U.S. presidential candidates John McCain and Barack Obama sparred over taxes and the economy on Tuesday night in Nasville, Tennessee, during their second debate ahead of the November 4 election.
"Americans are angry, they're upset and they're a little fearful," said McCain, a Republican senator from Arizona. "We don't have trust and confidence in our institutions."
Obama, a Democrat senator from Illinois, said the financial crisis was aided by deregulation of the financial industry supported by McCain and Republicans. He said middle-class workers, not just Wall Street, needed a rescue package that would include tax cuts.
"We are in the worst financial crisis since the Great Depression, and a lot of you I think are worried about your jobs, your pensions, your retirement accounts," Obama said.
GRIM DAY ON WALL STREET
Financial shares tumbled on Wall Street on Tuesday, led by Bank of America Corp's 26 percent drop, a day after the largest U.S. bank said it would sell $10 billion in new stock and stoked fears that other banks may also need to raise capital.
On Tuesday, the S&P 500 index shed another 6 percent. That broad measure of the U.S. stock market has now dropped 15 percent over five days, its worst run since 1987.
The interbank lending market, at the heart of the current crisis, remained stalled, with the cost of borrowing dollars, euros and sterling all higher as financial institutions sought to preserve capital and remained unwilling to lend to each other.
U.S. consumer borrowing dropped for the first time in a decade in August as banks began to tighten credit standards and consumers pulled back from spending.
Fed fund futures have priced in a 50-basis-point rate cut by the Fed this month, with a 75-basis-point cut an outside possibility. Expectations have built that the weekend meeting of Group of Seven officials in Washington could set the stage for coordinated rate cuts including the European Central Bank.