"Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit."

As the Federal Reserve cut its rates, the Bank of England reduced its key interest rate to 4.5 per cent and the European Central Bank dropped its key rate to 3.75 per cent.

But stock markets remained volatile in spite of the rate cuts, with banks nervous about lending between each other for fear of not being able to recover the loan.

US stocks closed lower on Wednesday, with the Dow Jones Industrial Average dropping 209.08 points, or 2.21 per cent, at the closing bell.

The Federal Reserve also announced on Wednesday that it was providing $37.8bn cash injection into troubled insurance giant AIG, which was nationalised last month.

The bank said it had used up an $85bn loan facility made available to AIG last month when the government took a controlling stake in the firm, considering it too big to fail.

China action

China also cut interest rates and lowered its banks' required reserves as part of the co-ordinated global effort.

It is the first time that the People's Bank of China has announced a change in interest rates at the same time as other central banks.

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Li Zhikun, senior economist at China Jianyin Investment Securities in Beijing, said: "It's good news. I think global central banks realised that they have to orchestrate their moves as earlier individual steps didn't give the markets the lift they were looking for."

The cost of one-year bank loans will fall from Thursday to 6.93 per cent from 7.20 per cent, while the benchmark one-year deposit rate will fall to 3.87 per cent from 4.14 per cent, the central bank said.

The global interest rate cuts are intended to stimulate the economy by encouraging consumers and businesses to spend more readily on lines of credit, such as mortgages and credit cards.

 

The concerted effort to increase confidence in the faltering global economy comes after US politicians passed an unprecedented $700bn bailout package to shore up its ailing banks. 

 

Analysts have predicted that the US economy will contract in the final quarter of this year and the first quarter of next year, meeting the definition of a recession.

 

British banks

 

Earlier on Wednesday, the British government announced plans to partially nationalise the country's major banks, in a package using up to $87.5bn of taxpayers' money.

 

The British treasury said that Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland and Standard Chartered have signed up for its so-called recapitalisation scheme.

 

"Following discussions convened by HM Treasury ... major UK banks and the largest building society have confirmed their participation in a government-supported recapitalisation scheme," the statement said.

 

As part of the plan, a credit line worth up to $350bn has also been opened to banks, the treasury said in a statement released before markets in London were due to open for trading.