The US Federal Reserve, the European Central Bank, Bank of England and central banks in China, Sweden, Switzerland and Canada all joined the new interest rate offensive, cutting rates by half a percentage point, a day after the Reserve Bank of Australia cut its cash rate by one percentage point to 6.0 per cent.

The banks highlighted in a joint statement that they had co-operated in "unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets" during the crisis.

They said inflationary pressures were easing as oil and other commodity prices fall due to the credit crunch cutting demand and so "some easing of global monetary conditions is therefore warranted".

The Bank of Japan expressed "strong support" for the half a percentage point rate cut but did not join in.

The action came just after Britain pumped $US87 billion ($123bn) into stricken banks and offered hundreds of billions of dollars more in loans, but that measure had failed to halt another market freefall over fears that the crisis was driving the world into recession.

Panic selling set hit Asian stock exchanges and a drop of 9.38 per cent in Tokyo prompted Japanese Prime Minister Taro Aso to voice "huge fears" for the future of the world`s second biggest economy. Hong Kong fell 8.2 per cent and Sydney 5.0 per cent.

European markets were also badly hit until the rate cut breathed some life into London, Frankfurt and Paris stabilising them after they saw major new falls.

Unveiling a package that will see Britain`s eight main banks part-nationalised, Prime Minister Gordon Brown said "the global financial market has ceased to function" and needed "bold and far-reaching solutions".

Britain`s initiative followed desperate efforts by other governments and institutions.

The European Central Bank said it would pump $US70 billion ($99bn) into interbank money markets in one-day loans, raising the daily amount by $US20bn.

The US Federal Reserve said it would buy up short-term corporate debt - sharply extending its role in the economy - and central bank chairman Ben Bernanke strongly hinted that a US interest rate cut was on the cards.

Japan and Australia pumped billions of dollars into the banking system and Hong Kong slashed interest rates but it all had little effect on investors.

The Tokyo stock market fall was the biggest one-day plunge since the 1987 crash.

"Honestly, this for us is beyond our imagination. We have huge fears going ahead," Mr Aso told a parliament committee.

Market dramas were played out around the world with stocks in Saudi Arabia - the largest bourse in the Middle East - down by more than 7.5 per cent.

Trading was again frozen on Russia`s two main stock markets after they plunged more than 11 per cent.

Wall Street`s Dow Industrial average gave up 5.1 per cent yesterday to close at a new five-year low.

US President George W Bush discussed the economic meltdown with leaders of Britain, France and Italy, seeking a common strategy ahead of crisis talks between the Group of Seven major economies in Washington on Friday.

French President Nicolas Sarkozy said co-ordinated action between governments and central banks was the only way to confront the "unprecedented financial storm".

The toll on the world economy is becoming clearer with as much as $US2 trillion ($2.8 trillion) wiped off the value of US retirement plans in the last 15 months, said the head of the Congressional Budget Office, Peter Orszag.

There was also grim news on the jobs front with beleaguered Swedish car maker Volvo saying it planned to cut another 3000 jobs.

Toyota shares plunged after a report that Japanese automaker will miss its profit forecast as the crisis reduces demand for cars.

The crisis has its roots in a wave of loans to US homebuyers with weak credit histories. Once they began to default on their sub-prime or higher risk mortgages, a chain reaction of chaos ensued.