The US Federal Reserve and central banks in Europe, Canada and Asia pumped as much as $US180 ($NZ275.14) billion into money markets today to combat shock waves from the worst financial upheaval since the Great Depression.
The move was aimed at boosting waning confidence that governments can stop the crisis from spinning out of control and at getting world banks to open their tightened purse strings.
Banks have been increasingly reluctant to lend to each other as distrust spread throughout the financial system.
Asian markets closed lower, but the Fed action helped send European stocks higher after three days of losses.
Wall Street initially rallied, but trimmed gains as the morning wore on, after plunging 450 points yesterday when a government bailout of American International Group, one of the world's largest insurers, failed to settle the markets' frayed nerves.
Worries that other financial companies could fail and further upend the economic system may cast a pall on the central banks' step, which spread billions of dollars around the world in exchange for foreign currencies.
President George W Bush said the markets were adjusting to the "extraordinary measures" taken in recent days.
"Our financial markets continue to deal with serious challenges," Bush said in two minutes of remarks.
"As our recent actions demonstrate, my administration is focused on meeting these challenges."
The president was to meet with economic advisers over much of the day, and was also seeing Treasury Secretary Henry Paulson at the White House.
For more than a year, investors have watched with growing alarm as the US economy, the world's largest, struggled to right itself before being tipped over the edge by massive foreclosures, shrinking consumer spending and rising inflation.
The turmoil has swallowed some of the biggest names on Wall Street. Three of its five major investment banks - Bear Stearns, Lehman Brothers and Merrill Lynch - have either gone out of business or been driven into the arms of another bank.
The two remaining - Goldman Sachs Group and Morgan Stanley - were under siege.
A sharp rise in borrowing costs has worsened.
The total amount of commercial paper fell by $US52.1 billion for the week ending yesterday, as banks cut back the short-term loans companies from small garment factories to General Electric Co depend on for their daily operations.
At the same time, the interest rate on those short-term loans more than doubled, with rates for seven-day paper jumping to 4.5 percent from 2.5 percent.
Russia closed its stock exchanges for a second day today as President Dmitry Medvedev pledged a 500 billion ruble ($NZ30.65) injection into financial markets to stem a dizzying plummet in share prices - and quash fears of a repeat of the country's 1998 financial collapse.
In a statement today, the Fed said it had authorised the expansion of swap lines, or reciprocal currency arrangements, with other central banks, including amounts up to $US110 billion by the European Central Bank.
The Fed also said new swap facilities had been authorised with the Bank of Japan for as much as $US60 billion and $US40 billion for the Bank of England.
All told, Fed action increased lines of cash to central banks by $US180 billion to $US247 billion.
At home, the New York Federal Reserve acted to ease a spike in overnight lending rates by injecting $US55 billion into the banking system in two operations of temporary reserves.
Democratic presidential contender Barack Obama said the Fed was taking the right steps to "maintain the functioning of our financial system and the flow of credit to American households and businesses."
Yesterday, the Dow Jones industrial average, which only two days earlier suffered its steepest drop since the days after the September 11 attacks, lost another 450 points. About $US700 billion in investments vanished.
Demand for super-safe Treasurys surged yesterday, sending the yield on the 3-month Treasury bill briefly into negative territory for the first time since 1940, as investors rushed for the closest thing to cash.
It was the fourth consecutive day of extraordinary turmoil for the American financial system, beginning with news on Sunday that Lehman Brothers, would be forced to file for bankruptcy.
The 4 percent drop yesterday in the Dow reflected the stock market's first chance to digest the Fed's decision to rescue AIG with an $US85 billion taxpayer loan that effectively gives it a majority stake in the company.
As the stock market staggered, the price of gold, which rises in times of panic, spiked as much as $US90.40 an ounce. Bonds, a traditional safe haven for investors, also climbed.
"The economy is not short of money. It is short of confidence," said Sung Won Sohn, an economics professor at California State University.
"It seems as though banks are hoarding cash, no matter what rate they could be lending it at," said David Rosenberg, North American economist at Merrill Lynch.
Mortgage rates, which fell after the US government's takeover of mortgage giants Fannie Mae and Freddie Mac, rose again, removing a glimmer of hope that the housing crisis, the kindling for the broader financial meltdown, was hitting bottom.
The Treasury Department, for the first time in its history, said it would begin selling bonds for the Federal Reserve in an effort to help the central bank deal with its unprecedented borrowing needs.
Separately, the Securities and Exchange Commission tightened rules on short selling, the practice of betting that a stock will fall.
