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The United States needs to act urgently to shield its economy from an escalating credit crisis and Europe must ready plans in case its problems worsen, the head of the International Monetary Fund said on Tuesday.

“We’re right at the moment where action is needed,” IMF Managing Director Dominique Strauss-Kahn told Reuters.

“A non-perfect plan is better than no plan at all,” he said of the $700 billion bank bailout plan rejected by the U.S. House of Representatives on Monday.

Strauss-Kahn said restoring market confidence required the bailout plan to be passed quickly and for the U.S. public to understand what is at stake unless the economy starts to function properly again.

As the crisis has spread beyond Wall Street, European countries have stepped up their efforts to avoid bank defaults as concerns grew that more institutions would fail, prompting the Irish government to guarantee all bank deposits.

The lack of a pan-European regulator makes it more difficult to respond to the crisis in the event of the collapse of a big bank whose business crosses borders, Strauss-Kahn said.

“Developing a contingency plan does not mean it’s announcing a lot of trouble coming. But they’re not totally immune (from the U.S. financial crisis), and so they need to organize. At the European level this is totally needed.

“The EU rules make it much more difficult than in the U.S.,” to act across borders, he said. 

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Group of Seven nations welcomed the $700 billion U.S. markets bailout plan on Monday and said they were prepared to step up international cooperation to protect the world’s financial and banking system.

But a day after Treasury Secretary Henry Paulson said he was “aggressively” encouraging other countries to put in place bailout packages of their own, there was little sign other G7 governments were prepared to follow Washington’s lead.

“We pledge to enhance international cooperation to address the ongoing challenges in the global economy and world markets and maintain heightened close cooperation between finance ministries, central banks and regulators,” the G7 ministers said in a statement following a conference call on Monday lasting 15-20 minutes.

“We are ready to take whatever actions may be necessary, individually and collectively, to ensure the stability of the international financial system,” they said.

The statement, a few weeks before G7 finance ministers and central bank governors meet in Washington on October 10, follows a tumultuous week that started with the demise of Lehman Brothers and ended with one of the biggest financial rescues in history.

The conference call at 7:30 a.m. EDT, which was convened on Sunday, followed intense telephoning between senior officials over recent days and a preparatory call by deputies to the ministers and central bank governors, a G7 source told Reuters.

The statement said ministers welcomed the “extraordinary actions” taken by Washington to remove illiquid assets that have contaminated banks’ balance sheets and fuelled a financial crisis widely seen as the worst since the 1930s.

LITTLE APPETITE 

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The Bush administration widened the scope of its $700 billion plan to avert a financial meltdown by including assets other than mortgage-related securities.

The U.S. Treasury submitted revised guidance to Congress on its plan late yesterday as lawmakers and lobbyists push their own ideas. The department also adjusted its new plan to insure money-market funds to limit protection to balances as of Sept. 19, after complaints from bank lobbyists.

Officials made the changes two days after unveiling plans for an unprecedented intervention in financial markets in an effort to halt the deepening crisis. The change to potentially allow purchases of instruments such as car loans, credit-card debt and other devalued assets may force an increase in the size of the package as the legislation proceeds through Congress.

“The Treasury's thinking is to make it as big and wide as possible so they have the flexibility to act if need be,'' said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors, which manages about $108 billion. “There have been losses on a whole range of U.S. debts and as the economy deteriorates in response to the housing slump those losses could escalate.''

Treasury officials now propose buying what they term troubled assets, without specifying the type, according to a document obtained by Bloomberg News and confirmed by a congressional aide.

`Significantly Higher'

“The costs of the bailout will be significantly higher than originally considered or acknowledged,'' said Josh Rosner, an analyst with independent research firm Graham Fisher & Co. in New York. “How, given these changes, can the administration and Federal Reserve believe they are being forthright in their unrevised expectation of future losses?''

Separately, the Treasury said in a statement late yesterday it would limit its $50 billion plan for insuring money-market funds to those held by investors as of Sept. 19, excluding any subsequent contributions.

The American Bankers' Association, which had expressed concern about the plan last week, praised the move, saying it would eliminate an incentive for savers to shift out of bank accounts into money-market funds. The Treasury put no limit on the money-market fund insurance, while the Federal Deposit Insurance Corp. protects bank deposits up to $100,000.

“If all money market mutual funds had been included with the government guarantee moving forward, this proposal would have threatened to take money out of local FDIC-insured banks,'' Edward Yingling, president of the ABA in Washington, said in a statement.

International Scope

In its latest guidance on the bad-debt fund, the Treasury said firms that are headquartered outside the U.S. will now be eligible.

The changes come after two days of weekend talks between administration officials and congressional staff in Washington. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke told lawmakers Sept. 18 that a comprehensive attack on the worst financial crisis since the Great Depression was critical after a series of government interventions failed to normalize markets.

Paulson on Sept. 19 announced his intention to seek legislation from Congress. Appearing on television talk shows yesterday he called for rapid passage of a bill. Congressional panels have scheduled two hearings this week on the crisis; Bernanke appears at a third hearing on the economic outlook.

Lawmakers are also seeking changes to Paulson's plan, which amounts to an unprecedented intervention in financial markets and would prevent courts from reviewing actions taken under its authority.

Lawmakers' Demands

Democrats are pressing for oversight through the Government Accountability Office, and for the inclusion of efforts to refinance mortgages for struggling homeowners. House Financial Services Committee Chairman Barney Frank wants limits on compensation of corporate executives who benefit from the program.

Republicans are urging limits on how any profits from the program could be spent.

“Just about everyone in the markets agrees the Paulson plan needs to be simple — unencumbered by complications and penalties,'' Christopher Low, chief economist at FTN Financial in New York, wrote in a note to clients. “Of course, Washington doesn't know how to do that.''

It was the third straight weekend of crisis work for Paulson and his Treasury colleagues. The previous week, Paulson and New York Fed President Timothy Geithner led talks with banks in an effort to avert the bankruptcy of Lehman Brothers Holdings Inc. While Lehman did end up in bankruptcy, Merrill Lynch & Co. agreed to be taken over by Bank of America Corp.

Weekend Warrior

On Sept. 7, Paulson seized Fannie Mae and Freddie Mac, the largest sources of U.S. mortgage financing, after the government-chartered, shareholder-owned companies failed to raise sufficient capital from private sources to satisfy regulators.

Late yesterday, the Fed approved requests from Goldman Sachs Group Inc. and Morgan Stanley, Wall Street's last two independent investment banks, to become bank holding companies.

“It's hard to say there are any illusions left'' about the seriousness of the financial crisis, said Jason Trennert, chief investment strategist at Strategas Research Partners in New York.

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Bankers and economists reacted with caution Friday to the broad outline of a government plan to take on troubled loans and other "bad" assets from banks in an attempt to unclog the nation’s financial system.

With most of the details yet to be worked out, bankers and others had more questions than criticisms of the plan. Treasury Secretary Henry M. Paulson, Federal Reserve Chairman Ben Bernanke and congressional leaders are expected to work out the details this weekend.

Left unclear were the answers to four key questions:

— What assets will the government accept, and what entity will accept them?

— Who will set the price for the assets?

— Will the government hold the assets for the long term, or will it sell them back into the market once the economy improves?

— Will the government accept assets from all banks, only large banks, or only the banks that are in trouble?

"I think action is certainly required," said Terrance McCarthy, chief executive of First Banks Inc. of Creve Coeur. But he was not sure taking bad loans off bank balance sheets would restore healthy sales of houses or free up the mortgage market.

Steve Marsh, president of Enterprise Bank & Trust in Clayton, said, "My initial reaction is that I’m glad to hear that there are serious proposals being considered because it’s clear that we’re facing unusual risk today."

Marsh said he was concerned about the burden the bailout could place on taxpayers. He said he hoped it would not benefit only the biggest banks. Marsh also expressed skepticism that a solution could be approved by Congress with elections less than seven weeks away.

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 NEWSWATCH: How much is TOO MUCH?

 NEWSWATCH: Will bailout help housing market?

 Wall Street ends wild week with biggest two-day rally in 38 years

 Area financial advisers survive storm

 STROUD: Market turbulence can test your level of risk tolerance

 Missouri regulators reassure AIG policyholders

 Credit market remains tight, but avoids collapse

Tom Chulick, chairman and chief executive of UMB Bank in St. Louis, said Paulson’s proposal calmed the market, but he wondered if the government can come up with an orderly means for assets to flow to and from whatever trust or institution the government designates.

"We think it’s going to be a net plus," Chulick said.

Todd Solomon, president of Pinnacle Financial Services Inc. in Chesterfield, said the plan could make it easier to get mortgages approved. Banks have been adding conditions on mortgages that can make it nearly impossible to close a deal. For example, he said, one lender asked that the borrower name it as a beneficiary of a life insurance policy.

Radhakrishnan Gopalan, an assistant finance professor at Washington University, said banks will have to take losses on the bad loans, even if they do sell them to the government. The loans now are difficult to value; removing them from the banks’ books could make bank financial statements more transparent and restore trust in the market, he said.

Anne Villamil, an economics professor at the University of Illinois at Urbana-Champaign, said she was concerned about how the losses from the financial institutions would be allocated among taxpayers and the private sector.

"I take (Paulson) at his word that this is designed to fix the fundamental problem," she said. At the very least, it will break the vicious cycle some institutions found themselves in of having their capital erode, being forced to raise more capital and then be downgraded because they had too much debt.

J. Fred Giertz, also an economist at Illinois, said he believed action was needed to "keep the financial system from exploding" and sending the economy into a long and severe recession or even a depression.

Although it may seem unfair that big banks and investment firms have gotten the most help from the government so far, the government had to do something to stop what could have been a deep downward spiral, Giertz said.

"It is a temporary fix, but if it’s done correctly and followed through on, it could be a step to a more stable situation," he said.

jerristroud@post-dispatch.com | 314-340-8384

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British bank Barclays is in talks with Lehman Brothers to buy its core U.S. broker-dealer business, including equity, fixed income, M&A advisory and other parts, people familiar with the matter said.

A deal could save thousands of jobs and many of Lehman’s core investment bank operations, a day after the U.S. bank’s holding company filed for bankruptcy protection.

Barclays said on Tuesday it was in talks to buy some of Lehman’s assets on terms that would need to be attractive to its shareholders. It declined to comment further.

The talks mainly involve the core U.S. business, which has 8,000 to 10,000 staff, but could include some of its global businesses, the sources said.

It does not include Lehman’s asset management and wealth management arms.

The sources said there is an urgency to the talks as a deal would need to be struck before staff and clients leave and damage the franchise.

A deal would include staff, infrastructure, licenses and some of Lehman’s financial positions, but would not leave the UK bank exposed to Lehman’s troubled assets, the sources said.

Barclays was involved in frantic talks over the weekend to rescue Lehman, but quit after U.S. authorities would not guarantee the U.S. investment bank’s trading obligations. 

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Tsingtao Brewing Co., one of China’s largest brewers, agreed that the 27 percent stake in the company that is currently held by Anheuser-Busch Cos. will transfer to InBev of Belgium when InBev finalizes its proposed takeover of Anheuser-Busch. A short notice about the agreement was filed today with the Securities and Exchange Commission.

InBev hopes to take over St. Louis-based Anheuser-Busch by the end of the year in a $52 billion buyout. The Tsingtao deal would give the combined company — Anheuser-Busch InBev — control of roughly one-fifth of the Chinese beer market, the world’s largest.

Anheuser-Busch said it first invested in China in 1993, when the company acquired a minority stake in Tsingtao. In October 2002, Anheuser-Busch and Tsingtao formed a strategic alliance to share best practices in areas such as production technology, marketing, sales and management. In 2005, Anheuser-Busch increased its investment in Tsingtao to 27 percent.

jmcwilliams@post-dispatch.com | 314-340-8372

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The Canadian Auto Workers union is trying to form a committee for a possible organizing drive at WestJet Airlines.

The CAW confirmed yesterday it has received calls from WestJet employees expressing interest in the union, and it is now working on a committee.

"We’re at a very preliminary stage," said union president Ken Lewenza, who took the reins of the CAW on Sept. 4. Lewenza, who ran Local 444 in Windsor for 14 years, succeeded Buzz Hargrove, who was CAW president for 16 years.

Calgary-based WestJet employs about 5,700 and promotes the idea of workers becoming owners of the company.

The CAW wants to become more aggressive in organizing outside the manufacturing sector, where it has lost thousands of members in recent years because of plant closings. The union already represents some 5,000 Air Canada workers.

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Stocks plummeted Thursday, with the Dow plunging around 345 points as mixed retail sales, lower oil prices and dour labor market readings amplified worries about a global economic slowdown.

The concerns overshadowed a better-than-expected sales report from Wal-Mart Stores and surprisingly strong readings on productivity and the services sector.

The Dow Jones industrial average (INDU) lost 345 points, or 3%. It was the fourth-biggest one-day decline on a point basis this year and the third-worst day on a percentage basis.

It was the 51st session in 2008 in which the Dow posted triple-digit losses, according to Dow Jones. That’s the worst record for the blue-chip barometer since 2002, when the Dow declined at least 100 points 67 times during the year.

The big daily swings this year reflect the markets’ volatility amid the uncertainty concerning the economy and financial sector.

The broader Standard & Poor’s 500 (SPX) index fell 3.2% and the Nasdaq composite (COMP) lost 3%.

Small caps got pummeled too, with the Russell 2000 (RUT) index plunging 3%.

Friday’s focus will be the August employment report from the government. But economists don’t expect a job market turnaround anytime soon. (Full story).

Investors have come back from Labor Day and the summer to find that few of the negatives have changed, said Gus Scacco, managing director at AG Asset Management.

"The market is looking out and trying to discount six months from now, but all the same issues are still there," he said. "And now there’s more of a realization that global growth has slowed. That’s become a front-burner issue."

Stocks were mixed Wednesday as falling oil prices, a sluggish economic reading from the Federal Reserve and weak sales reports from many automakers added to recession fears. Such concerns were magnified Thursday by the retail sales reports and economic news.

"I think the economy is really weak and this bear market is a correct reflection of that," said Len Blum, managing director at Westwood Capital.

He said that whether it meets the technical definition of a recession or not, the current environment feels like a recession and it’s being led by the consumer.

"Consumers are getting hit on a lot of fronts," he said. "They’re getting crushed at the grocery store and the gas pump, they can’t borrow and the labor market is weak."

A lot of those realities were reflected in the day’s news.

Adding to the gloom and doom in the afternoon: comments from two Fed officials that reiterated the central bank’s dour forecast. Dallas Fed president Richard Fisher discussed anemic growth. San Francisco Fed president Janet Yellen said that the credit crunch is severe and deepening and that the housing market has not bottomed yet.

Additionally, bond manager Bill Gross stated in a commentary on the PIMCO Web site that the Treasury needs to step up its efforts to help Fannie Mae and Freddie Mac and to rescue the housing industry.

Wal-Mart: The world’s leading retailer reported stronger-than-expected August sales at its stores open a year or more, a metric known as same-store sales. Sales rose 3% versus forecasts for a rise of 1.6% and included the critical back-to-school period. (Full story)

Wal-Mart (WMT, Fortune 500) shares ended the session barely lower.

Other retailers: While Wal-Mart and select other discount retailers benefited from the need for a strapped consumer to still buy essentials, mall-based clothing chains and high-end sellers suffered.

Clothing chain Abercrombie & Fitch (ANF) said sales fell 11%, versus forecasts for a 7.9% drop. Shares slumped 6.8%. Pacific Sunwear of California (PSUN) reported a decline of 6%, shy of forecasts for a drop of 8.8%. Shares dropped 4%.

On the high end, Saks (SKS) said same-store sales fell 5.9% versus forecasts for a drop of 4.7%. Shares were little changed. Nordstrom (JWN, Fortune 500) said same-store sales slumped 7.9%, worse than the 7.1% consensus. Shares slipped 4%.

Jobs: The number of Americans filing new claims for unemployment jumped unexpectedly last week, rising to 444,000 from a revised 429,000 the previous week, the government said. Economists surveyed by Briefing.com thought claims would fall to 420,000 last week.

A separate report from payroll services firm ADP showed that the private sector lost 33,000 jobs in August, eclipsing forecasts for a drop of 30,000.

The report can sometimes be a harbinger of the broader government-issued monthly employment report, due Friday. Employers are expected to have cut 75,000 non-farm jobs from their payrolls, after cutting 51,000 in July. The unemployment report, generated by a separate survey, is expected to hold steady at 5.7%.

Other economic news: Other reports were more positive. Second-quarter productivity was revised up to a 4.3% annualized rate from an initial rate of 2.2%. Economists thought it would be revised up to a 3.5% rate.

At the same time, unit labor costs, the report’s inflation component, showed a bigger-than-expected decline, suggesting that the boost in productivity has not boosted wages.

And the Institute for Supply Management’s reading on the services side of the economy showed expansion in the sector, versus forecasts for further erosion. The index rose to 50.6 in August from 49.5 in July. Economists thought it would hold steady at 49.5. Any number over 50 signals expansion and a number below it signals weakness.

Company news: Ciena (CIEN) reported a steep drop in fiscal third-quarter profit and warned that fourth-quarter sales won’t meet forecasts as large customers delay purchases due to the weak economy. Shares of the network-gear maker slumped almost 25% in active Nasdaq trade and dragged on the technology sector. (Full story).

Cisco (CSCO, Fortune 500), Oracle (ORCL, Fortune 500), Intel (INTC, Fortune 500), Yahoo (YHOO, Fortune 500), Amazon.com (AMZN, Fortune 500) and Google (GOOG, Fortune 500) were among the big tech stocks sinking.

Blue chips were hit hard too, with 29 of 30 Dow components sliding. The lone exception was Coca-Cola (KO, Fortune 500).

The Dow’s biggest losers were financial components AIG (AIG, Fortune 500), American Express (AXP, Fortune 500), Bank of America (BAC, Fortune 500), Citigroup (C, Fortune 500) and JP Morgan Chase (JPM, Fortune 500).

Caterpillar (CAT, Fortune 500) declined 5.6%. The heavy-equipment maker has been sliding for the last few sessions and was also reacting Thursday to fellow machinery maker Terex (TEX, Fortune 500)’s warning that 2008 profit won’t meet forecasts. Terex fell almost 20%.

Aluminum producer Alcoa (AA, Fortune 500), aerospace companies Boeing (BA, Fortune 500) and United Technologies (UTX, Fortune 500), automaker General Motors (GM, Fortune 500) and telecom Verizon Communications (VZ, Fortune 500) all lost around 4%.

Among other movers, airlines, railroads and truckers declined, dragging down the Dow Jones Transportation (DJTA) average by 2.7%.

Market breadth was negative. On the New York Stock Exchange, losers beat winners five to one on volume of 1.3 billion shares. On the Nasdaq, decliners topped advancers by nearly four to one on volume of 2.38 billion shares.

Fuel prices: U.S. light crude oil for October delivery fell $1.46 to settle at $107.89 a barrel on the New York Mercantile Exchange, a fresh five-month low.

Prices slipped after the government’s weekly inventories report showed crude stockpiles tumbled unexpectedly. Investors were also keeping an eye on updates about the damage from Gustav to Gulf Coast oil facilities, which account for about 25% of U.S. oil production.

Oil has fallen steadily over the last few weeks after tumbling more than 20% off the record high of $147.20 a barrel hit on July 11. Worries about Gustav’s impact initially added to that rise, but the storm proved to be less destructive than had been feared, and oil prices resumed their slide on bets of a global economic slowdown. (Full story)

Gas prices declined for a fourth straight day, according to a national survey of credit-card activity. Even the Gustav-ravaged Gulf Coast states saw prices decline.

Other markets: In global trade, Asian and European markets ended lower.

In the bond market, Treasury prices rallied, lowering the yield on the benchmark 10-year note to 3.62% from 3.70% late Wednesday. Prices and yields move in opposite directions.

The dollar gained versus the euro and fell versus the yen.

COMEX gold for December delivery fell $5 to $803.20 an ounce. 

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Despite Hurricane Gustav’s threat to infrastructure in the Gulf of Mexico, oil prices fell from an earlier rally Friday as the dollar gained traction against the euro.

U.S. crude for October delivery fell 13 cents to settle at $115.46 a barrel. Prices were higher earlier as investors braced for the storm, which is expected to make landfall in the U.S. on Tuesday morning.

Oil rose as high as $118.76 during Friday trading as Gustav bore down on the Gulf, but then pulled back as the dollar gained strength against the 15-nation euro.

Dollar rises: The dollar gained against the euro after a Chicago Purchasing Managers Index report showed an unexpected increase in manufacturing activity around the Chicago area.

A University of Michigan report also showed a better than expected rise in consumer sentiment.

The two reports lessened the impact of a reported decline in personal income, which signaled that the effects of the government’s $90 billion stimulus program were drawing to an end.

The decline in personal income also indicates that consumers may not have money to pay for a lot of expensive petroleum-based fuel, which pulled oil down as well.

Additionally, oil is traded in dollars, so a stronger dollar makes oil more expensive for foreign investors. As the dollar rises, many who purchase commodities as a hedge against inflation transfer their money into other markets.

The dollar rose against euro Friday, but fell against the Japanese yen.

Gustav bears down: Oil prices lost traction despite projections that Hurricane Gustav will to enter the Gulf on Sunday. Some models show the storm could reach Category 4 strength before it reaches Cuba, according to the National Hurricane Center.

Royal Dutch Shell (RDS), ExxonMobil (XOM, Fortune 500) and ConocoPhillips (COP, Fortune 500) were among the oil companies prepared to evacuate major offshore rigs Friday.

Facilities in the Gulf account for about 25% of U.S. oil production. Offshore platforms and pipelines buried in the sea bed are vulnerable to extreme storms such as hurricanes.

Just three years ago, hurricanes Katrina and Rita devastated oil facilities before battering the Louisiana coast. The storms, which reached Category 5 strength before making landfall, destroyed 113 offshore oil and natural gas platforms and damaged 457 pipelines in 2005.

Oil companies are shutting down production and oil traders are hedging their bets ahead of the weekend, according to Karen Matusic, spokeswoman for the American Petroleum Institute.

"Even if the storm doesn’t hit, you’re going to get companies evacuating the rigs for precautionary reasons," she said.

Storm upgrades: Oil companies have tried to improve the storm resistance of offshore rigs and pipelines since Katrina and Rita.

Drilling rigs and production platforms moored to the sea floor in the Gulf had been attached with eight lines, and are now required to be moored with 12 to 16 lines. Pipelines are now required to be buried deeper beneath the sea floor.

"That’s one reason the response to this storm has been somewhat muted so far," said Jim Ritterbusch, president of oil advisory firm Ritterbusch and Associates.

The new safety measures should make facilities much more resistant to storm damage, but Gustav would be their first real-world test.

"There’s concern for the offshore platforms," said Michael Lynch, president of Strategic Energy & Economic Research, Inc. But the biggest concern is "power loss at some facilities," he said.

If the storm disrupts electricity, the platforms may be unable to operate. However, facilities are generally better equipped to handle power outages now than they were in 2005, according to Lynch.

"The biggest risk is that you get the major loss of a natural gas processing facility," said Lynch. Fluctuations in natural gas prices can also affect crude oil, since both are used in similar applications such as home heating.

On Thursday, Gustav sent crude prices as high as $120.50, although prices later fell in part because of a report that there was a large increase in natural gas supplies.

If the storm does make a direct hit on Gulf facilities, the Energy Department said Thursday it was prepared to release supplies from the government’s 700 million barrel Strategic Petroleum Reserve to cushion the blow. 

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Lending between U.K. banks slumped 68 percent in July as financial institutions hoarded cash to shore up their balance sheets, signaling Bank of England efforts to revive money markets aren't working.

The volume of interbank lending in the British currency fell to 205 billion pounds ($370 billion), from 635 billion pounds in July last year, according to central bank data published today. Lending averaged 269 billion pounds a month since the credit crunch started in August 2007.

Banks are curtailing lending while losses from the collapse of the U.S. subprime-mortgage market climb above $500 billion. Interbank lending rates are little lower now than they were in April, when the Bank of England offered to take on damaged mortgage-backed bonds in an effort to unfreeze lending. The strains in global money markets will probably persist “for some time,'' the Bank for International Settlements said today.

“We're in the same position we were in last year, with banks hoarding cash to refinance their own beleaguered balance sheets,'' said Christoph Rieger, a fixed-income strategist at Dresdner Kleinwort in Frankfurt. “The Special Liquidity Scheme has helped individual banks by preventing them from becoming illiquid, but it hasn't helped money markets return to normal.''

The July figure, which excludes central bank transactions, is up from 195 billion pounds in June. The total peaked at 656 billion pounds in February last year, and has averaged 270 billion pound since the data began in 1997.

Brink of Recession

The central bank program allows commercial banks to swap mortgage-backed securities harmed by the credit squeeze for government bonds. The lending freeze led to the collapse of mortgage lender Northern Rock Plc in September, triggering the first run on a U.K. bank in more than 140 years.

The credit famine and the fastest inflation in at least a decade have brought the U.K. to the brink of a recession. Gross domestic product stagnated in the second quarter, ending the nation's longest stretch of economic growth in more than a century, according to government data.

Bank of England Governor Mervyn King said in June he will unveil a new money-market system this year to cope with both “normal'' and “stressed'' conditions. He hasn't said when or whether banks will reveal their participation in the April plan.

“It's significant that lending volumes have stopped falling, but what's worrying is the level where they've stabilized,'' said Lena Komileva, an economist at Tullett Prebon Plc in London. “This new order reflects weak confidence in credit quality as a result of banks struggling to refinance their loan books. It's a striking illustration of a crisis at its height.''

Pressures `Continue'

Interest-rate derivatives imply that banks are becoming more hesitant to lend on speculation credit losses will increase as the global economic slowdown deepens.

The premiums banks charge each other for three-month cash relative to the overnight indexed swap rate widened to 78 basis points today from 12 basis points on July 31, 2007, before the credit crunch took hold in the U.K. It has averaged 69 basis points in the past 12 months, up from an average of 11 basis points in the preceding year.

“The term structure of Libor-OIS spreads suggests the interbank market pressures are expected to continue for some time,'' Ingo Fender and Jacob Gyntelberg, analysts at the BIS, wrote in the Basle-based bank's quarterly report.

The increase in short-term borrowing costs triggered questions over the accuracy of the London interbank offered rate, the benchmark interest rate administered by the British Bankers' Association and used to calculate rates on $360 trillion of financial products worldwide.

The BIS said in March some banks may have understated their borrowing costs to avoid being seen as having difficulty raising financing.

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