US authorities unveiled plans Tuesday to inject billions of dollars into banks to ease a global credit crisis, as European economies showed signs of recession and a powerful global stock rally stalled.
The government infusion of up to 250 billion dollars into struggling banks and new guarantees to help restore credit flows marked the latest effort in the battle against a loss of global confidence.
Nine large banks including Citigroup, JPMorgan Chase and Goldman Sachs agreed to give the government equity stakes in exchange for new capital, officials said on announcing the first program of its kind since the Great Depression.
"This is an essential short-term measure to ensure the viability of America's banking system," President George W. Bush said on unveiling the initiative.
Bush said the measures "are not intended to take over the free market, but to preserve it."
Analysts said the effort by Washington on the heels of similar efforts in Britain and elsewhere offered hope that the crippling financial crisis could be tamed.
"It took a while, but US policymakers have finally deployed measures aimed directly at the heart of the problem," said economist Aneta Markowska at Societe Generale.
John Ryding at RDQ Economics said the actions by the United States and other economic powers "finally mark the wider firebreak that will contain the crisis."
But he said the major economies "appear to have already slipped into recession and the aftershocks of the recent intensification of the credit crisis will likely further hurt these economies. Nonetheless, we think that the risk of a catastrophic failure of the financial system has now been significantly reduced."
A powerful global stock rally that began a day earlier in anticipation of the US plan ran out of steam however.
The Dow Jones Industrial Average fell 0.82 percent to 9,310.99, giving back a portion of a whopping 936-point or 11 percent gain Monday, which was the biggest point gain ever and largest percentage rise in 75 years.
The Nasdaq fell a hefty 3.54 percent reflecting worries about profits in the tech sector and the broad Standard & Poor's 500 index dipped 0.53 percent after surging on Monday.
In London the FTSE 100 index of leading shares rose 3.23 percent while in Paris the CAC 40, which on Monday gained more than 11 percent, added 2.75 percent.
The Frankfurt Dax, which had also eclipsed 11 percent on Monday, finished with a gain of 2.70 percent.
Markets across the globe have been in a state of panic since the middle of last month when Wall Street investment bank Lehman Brothers filed for bankruptcy after the US government refused to bail it out.
Banks and other financial institutions around the world have been hit by bad debts stemming from the granting of so-called subprime loans to house-buyers in the United States.
The chairman of the Eurogroup of finance ministers, Jean-Claude Juncker, warned meanwhile that it was too early to sound the all-clear on the financial crisis.
"Despite the positive reaction of the markets in the last two days, there is no reason to declare the end of financial crisis and swing into exaggerated enthusiasm," Juncker told the Luxembourg parliament.
Earlier Tuesday, Japan's Nikkei stock index posted its biggest ever gain, skyrocketing more than 14 percent as investors flocked back to the market on hopes of an easing of the crisis.
The Bank of Japan also announced new steps on Tuesday aimed at thawing frozen bank lending, offering unlimited dollar funds, as it left its super-low interest rates on hold at an extraordinary meeting.
Australia launched a 7.25 billion US dollar economic stimulus package which Prime Minister Kevin Rudd said was intended to address concerns that the crisis was moving beyond dramatic losses in share values to pose a threat to economic growth.
France's lower house of parliament approved the country's massive 360-billion-euro (490-billion-dollar) bank rescue package, with the upper house due to consider the proposal on Wednesday.
Some of the shine from the renewed financial market confidence was rubbed off by downbeat data highlighting how the turbulence had affected jobs and growth.
A new Bank of France forecast predicted the economy would contract 0.1 percent in the third quarter, showed the country was heading into recession after a 0.3 percent drop in the previous quarter.
A group of German economic think tanks said Europe's biggest economy was likely to grow at only around 0.2 percent in 2009.
"In the autumn of 2008, the German economy is on the brink of a recession," the six institutes wrote in their latest economic outlook.
Ireland's economy will contract by 0.75 percent next year, Finance Minister Brian Lenihan said as he delivered his budget.
In Washington, banks will have an option to join the nine major lenders in the capital infusion program, in which the government gets "senior preferred shares" which would be "non-voting" except to protect investment rights, according to a Treasury statement.
Banks in the program will agree to limits on executive pay and other benefits.
In a related move, the government will also temporarily guarantee bank debt that includes interbank funding and offer unlimited deposit insurance for many accounts as part of a stepped-up global effort to stem a credit crunch.
Officials also said that the Federal Reserve would soon act as the "buyer of last resort" for commercial paper, which is short-term corporate debt that is critical for financial markets and companies needing cash for operating expenses.
The efforts are part of the 700-billion-dollar bank bailout announced last month. European nations announced their own 1.8 trillion euro (2.4 trillion dollar) package on Monday after a weekend pledge by the world's wealthiest nations to use all available tools to save key financial institutions.
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