Until now, U.S. policy under a $700 billion (409 billion pound) bailout plan approved last week has focussed on a plan to buy up distressed assets from banks.

But many analysts have said that a U.S. government move to shore up the capital position of hobbled banks would be a more direct way to break the logjam in credit markets that has shut down new borrowing for consumers and businesses.

South Korea and Taiwan cut interest rates on Thursday following the coordinated cuts on Wednesday by major central banks including the U.S. Federal Reserve. Japan was considering other measures in the face of new recessionary signals.

European stocks lost more than 2 percent after trading higher much of the day.

At the centre of a financial crisis now almost a month old, credit markets remained distressed. With banks unable to take on risk and desperate to protect capital, the interbank cost of borrowing dollars rocketed. Three-month interbank rates for dollar loans hit their highest level of the year.

Finance ministers and central bankers from the Group of Seven major industrial nations will meet in Washington on Friday.

"The coordination that needs to take place is probably greater than the G7 itself. That's why it's important that this meeting is also the G20," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.

"Given the fragility of market sentiment right now, a disappointment could further exacerbate the problem."

That has raised the question of what options remain for policy makers to combat the market meltdown, which has toppled banks in Europe and the United States and raised new concern about whether the global economy can avoid recession.

"I can't think of what else people might come up with here. Various countries have done bits and pieces. Nobody has done all of them," said David Mackie, head of Western European economic research at JPMorgan.

"It's not entirely obvious that these measures are turning the tide," Mackie said. "At the end of the day, if you socialize enough of the financial system, it has to work."

One option for policymakers could be for other countries to follow Britain's pledge to guarantee short-term interbank lending.

UNCLE SAM AS SHAREHOLDER?

The Treasury's bank recapitalization plan was an option included in the $700 billion rescue plan approved last week in which the government will buy bad loans from financial institutions in the hope that it will jump-start lending.

Treasury plans to inject capital in exchange for common and preferred shares and does not intend to seek board seats in the voluntary program, the person familiar with Paulson's thinking told Reuters.

The United States would be following the lead of Britain, which said on Wednesday it was prepared to inject 50 billion pounds ($87 billion) of taxpayer money into its banks.

U.S. markets faced additional uncertainty after a ban on short-selling of financial stocks expired at midnight on Wednesday.

Financial stocks came under renewed pressure. The S&P financial index dropped 11 percent.

Short-sellers bet on falling stock prices and have been blamed for driving share prices lower, though advocates of the tactic say they were first to point out underlying weakness in financial firms.

Elsewhere, shares in General Motors Corp shares fell to their lowest level since 1950 as concerns mounted that an industry decline that started in the United States was spreading to faster-growing markets overseas.

Shares of GM, the top U.S. automaker by sales, fell as much as 33 percent to $4.65 -- driving its market capitalisation to its lowest level since 1929.

(Additional reporting by Reuters bureaus around the world; writing by Kevin Krolicki; editing by Brian Moss, Steve Orlofsky, Gary Hill)