Japan cuts rates to stem crisis, Europe to follow

TOKYO/HONG KONG (Reuters) – Japan cut interest rates for the first time in seven years on Friday and warned severe conditions in the global economy could persist, as more central banks shift from stabilizing credit markets to slashing borrowing costs in the face of the worst crisis since the Great Depression.

Bank of Japan (BoJ) Governor Masaaki Shirakawa speaks during a news conference in Tokyo October 31, 2008.

However, the rate reduction was a close call at the Bank of Japan and was not as big as many had expected, sending a mixed message to financial markets.

Policy makers have been struggling to find the right response to a rapid slowdown in the global economy that has hurt corporate profits and which sparked a record freefall in global stock markets in October.

Companies world wide have reported job cuts, warned of falling profits and battered balance sheets in what Japanese Prime Minister Taro Aso described as a "harsh storm seen only once in 100 years."

British Bank Barclays Plc is close to raising about 6 billion pounds ($9.8 billion) from a number of potential investors, a person familiar with the matter said. Details could be announced later on Friday.

Underlining the corporate gloom, Mizuho Financial Group became the second major Japanese bank this week to cut its full-year net profit forecast by more than half because of bad loans and losses in its equity portfolio.

The Bank of Japan cut its benchmark overnight call rate to 0.30 percent from 0.50 percent, a slightly smaller reduction that the quarter percentage point many had expected.

A 4-4 vote on the policy board meant the central bank governor had to cast the deciding vote.

"At a time of extreme financial uncertainty and volatility, to have a policy board so evenly split is hardly reassuring," said Glenn Maguire, Asia Pacific chief economist with Societe Generale in Hong Kong.

"Whatever the desired outcome -- the fact that the board was so evenly split jeopardizes that outcome."

Japan's Nikkei share average fell 5 percent, making its drop this month a record 24 percent.

The rate reduction is the latest in a series of rate cuts globally as central banks move rapidly to try to cushion growth now that interbank lending rates have been consistently falling.

The average benchmark interest rate in the Group of Seven countries has dropped to 2.36 percent, the lowest since April 2005, from 4 percent in August 2007 when credit markets began imploding because of mounting subprime mortgage defaults.

Economists widely expected Australia, Britain and the euro zone to cut rates next week.

The economies of Britain, Europe, Japan and the United States are contracting. The latest growth data showed the U.S. economy shrank in the third quarter, three months that ended with the dismantling of Wall Street in September.

SIGNS OF LIFE

Despite the potential for higher unemployment and softer consumer spending around the world, there were some signs rate cuts from Beijing to Washington and massive doses of liquidity were unlocking short-term financing for banks and improving investor sentiment.

A top Australian policy maker on Friday said the Federal Reserve's massive expansion of U.S. dollar swaps with other central banks seemed to be working to ease pressures in global markets.

The efforts also showed some signs of relieving panicked investors. The MSCI all-country world equities index is set for its biggest weekly rise since the gauge started 20 years ago.

China reduced its benchmark rate for the third time in two months earlier this week and the U.S. Federal Reserve eased its rate on Wednesday to the lowest level since June 2004.

Along with central banks, governments around the world were waging an all-out battle to contain the fallout from the financial crisis, including by cutting taxes, taking equity stakes in banks and backing bank deposits.

The South Korean government is considering $7.3 billion in additional spending to support domestic demand, according to a local business paper, as the worst fears appeared to have dissipated about a meltdown in Asia's fourth-largest economy.

The global largesse has been mostly centered on the bank industry and consumers, leaving others like the automobile industry to face upheaval among car makers largely without government help. Six U.S. governors urged the White House for aid on Thursday.

A deal to merge General Motors Corp and Chrysler LLC hit an impasse after the Bush administration ruled out funding for it, putting any merger on hold until after the U.S. presidential election, three people with direct knowledge of the talks said.

Such a merger could result in as many as 40,000 job cuts, a study by Kimberly Rodriguez of consultant Grant Thornton shows.

On Thursday, Japan unveiled a $50 billion economic stimulus package and German cabinet minister Michael Glos said the European country planned to introduce a range of steps worth up to $39 billion.

The Fed alone has made available through swap lines a sea of U.S. dollars to central banks globally so they can meet financing demands.

"Overall, it appears this has had some success with conditions in the U.S. dollar swap markets improving over the last few weeks, and the cost of U.S. dollar funding declining to more normal rates," said Reserve Bank of Australia Assistant Governor Guy Debelle at a conference.

The U.S. economy shrank at a 0.3 percent annual rate in the third quarter, the sharpest contraction in the United States in seven years. U.S. consumers slashed spending at the fastest rate in 28 years in the third quarter.

Asia stock markets mixed, Nikkei slides

BANGKOK, Thailand – Asian markets were mixed Friday as Japanese stocks fell despite the first rate cut in seven years while Indian shares soared to catch up with the global market rally after a holiday there.

Investors were also digesting data overnight that confirmed the U.S. economy — a major export market — had contracted in the third quarter.

Tokyo's Nikkei 225 index sank 5 percent to 8,576.98 despite the Bank of Japan's decision to lower its key rate from 0.5 percent to 0.3 percent. Analysts said some investors viewed the measure as half-hearted and wanted a full quarter-point cut.

South Korea's market extended the previous session's 12 percent rally with the Korea Composite Stock Price Index up 2.8 percent at 1,113.29. Australia's key index climbed out of negative territory to close 0.4 percent higher.

"Clients are a little more willing to re-enter the markets as the sense of panic has subsided a bit and valuations have been hammered to ridiculous levels," said Andrew Yates, vice president of foreign institutional sales at Asia Plus Securities in Bangkok.

"Obviously further volatility is likely but funds are picking up stocks at cheap levels for end of month rebalancing of portfolios," he said.

Hong Kong's Hang Seng was down 1.5 percent at 14116.75 after vaulting 12.8 percent Thursday but smaller Asian markets such as the Philippines, Taiwan and Thailand posted gains of 3 percent or more while Jakarta's main index surged 7.1 percent.

In India, the benchmark Sensex index surged 7.3 percent to 9,693.43 as traders caught up with Thursday's rally in Asian markets, when investors cheered a U.S. Federal Reserve rate cut and further central bank steps to boost dollar liquidity in emerging markets.

Japanese stocks were modestly lower for much of the day after jumping nearly 10 percent Thursday on expectations of a rate cut by the central bank.

But when the Bank of Japan announced the cut — first since March 2001 — the market fell sharply. With interest rates in Japan already the lowest in the developed world, many analysts doubt looser monetary policy will do much to stimulate the world's second largest economy.

The Bank of Japan's policy board were split 4-4, so Gov. Masaaki Shirakawa, who has the final say in the event of a tie, voted in favor of the cut.

The bank warned that "adjustments in the world economy stemming from financial crises in the United States and Europe have further increased in severity."

Honda Motor Co. fell 13 percent to 2523 yen, Mitsubishi UFJ Finance was down 5.4 percent at 598 yen and Sony Corp. was down 2.2 percent at 2280 yen.

U.S. data overnight confirmed the world's largest economy contracted in the July-September quarter by an annual pace of 0.3 percent, marking the worst showing since it contracted at a 1.4 percent pace in the third quarter of 2001.

"The U.S. economy obviously contracted a lot more than the data says and it is likely to be revised lower. There are clear signs the contraction accelerated from September onward so the fourth quarter will also be weak," said Yates.

The Dow Jones industrial average rose 189.73, or 2.11 percent, to 9,180.69. The S&P 500 index rose 24.00, or 2.58 percent, to 954.09.

U.S. stock index futures were lower, suggesting Wall Street would pull back Friday.

Confirmation the American economy is on the ropes sent oil below $65 a barrel in Asian trade with light, sweet crude for December delivery down $1.71 to $64.25 a barrel in electronic trading on the New York Mercantile Exchange by midday Friday in Singapore.

Japan's Nikkei stock index down 5 percent at close

TOKYO – Japan's benchmark stock index closed down 5 percent Friday with investors dumping stocks after the central bank's smaller-than-expected cut in its key interest rate.

The Nikkei 225 index lost 452.78 points to close at 8,576.98 points.

Japanese stocks were modestly lower for much of the day but losses accelerated after the Bank of Japan announced it had reduced the uncollateralized overnight call rate to 0.3 percent, the first cut in more than seven years.

"The move fell short of the widely expected cut to 0.25 percent," said Yumi Nishimura, market analyst at Daiwa Securities SMBC. "But the market also welcomed the move as a step to stay in line with the rest of the world."

The central bank warned that "adjustments in the world economy stemming from financial crises in the United States and Europe have further increased in severity."

Nishimura said the Nikkei's drop Friday was also a brief break after the hefty gains earlier this week.

The Nikkei soared 10 percent Thursday, closing at 9,029.76 for its third consecutive gain, lifted by a U.S. rate cut and hopes for a similar move in Japan. The index advanced 26 percent over the three days.

The U.S. Federal Reserve on Wednesday slashed its key interest rate by half a percentage point to 1 percent, a level seen only once before in the last half-century, aiming to shore up the world's largest economy as it slips into recession.

Exporters including autos and technology issues were among decliners Friday as the yen gained against the dollar.

A strong yen hurts Japanese exporters by eroding their dollar-denominated overseas earnings when converted back to the Japanese currency.

Honda Motor Co. fell 13 percent, and Mazda Motor Corp. declined 13.8 percent. Electronics maker Pioneer Corp. dropped 15.2 percent, and Nikon Corp. lost 18.1 percent.

The broader TOPIX index of all first section issues closed down 3.6 percent to 867.12 points.

Asian stocks dip to end worst month ever

HONG KONG (Reuters) – Asian shares dipped on Friday and headed for their biggest ever monthly fall, but optimism that a new round of interest rate cuts may revive a comatose global economy helped many indexes keep their largest weekly gains on record.

The Bank of Japan cut interest rates to 0.3 percent on Friday, its first rate cut it seven years, but the move was smaller than expected and came after a split vote. The yen rose while Nikkei average (.N225) extended losses to close down 5 percent after the decision.

European stocks were set to open as much as 1.5 percent higher, according to financial bookmakers, helped by optimism about the cushioning impact of recent rate cuts.

Oil prices dropped nearly $2 a barrel after data on Thursday showed the U.S. economy suffered its sharpest contraction in seven years in the third quarter, as consumers cut spending and businesses reduced investment.

And prices for base metals continued to slide, with Shanghai copper down a record 41 percent this month alone, on persistent concerns the global economy faces a potentially severe and long recession.

Policy makers have responded by cutting rates and injecting liquidity, as well as adopting unprecedented rescues of their banking sectors. After weeks of erosion in investor sentiment, some analysts are now wondering whether the worst might now be behind, at least for now.

"There's a bit of a tug-of-war going on, since investor sentiment has changed slightly on the sense the market may have bottomed out for now, and people are willing to buy," said Tomomi Yamashita, a fund manager at Shinkin Asset Management.

WEEKLY GAIN, MONTHLY FALL

The MSCI index of Asian stocks outside Japan (.MIAPJ0000PUS) fell 0.6 percent by 0640 GMT.

The index is up 13 percent this week, its biggest weekly gain on record but is still down some 24 percent for the month and about 54 percent for the year.

Japan's Nikkei hit a 26-year low this week but rallied as much as 30 percent in a three-day surge to Thursday.

Shares in South Korea (.KS11) gained 2.6 percent, while Taiwan (.TWII) surged 4 percent, and India added 7 percent.

Markets in Singapore (.FTSTI) and Australia (.AXJO) posted smaller gains, while shares in Hong Kong (.HSI) and Shanghai (.SSEC) fell amid profit-taking and concerns over earnings.

The focus of policy makers worldwide has shifted from stabilizing credit markets and providing funds to banks, to attempts at reviving their economies by cutting interest rates.

UNCERTAINTY REMAINS

But plenty of apprehension remained after the intensely volatile period in global markets following the collapse of Lehman Brothers in mid-September.

The yen extended its gains against the dollar on Friday after the Bank of Japan's action. The currency has been supported as investors unwind investments in risky assets that had been funded by borrowing the low-yielding yen.

The yen gained to around 97 yen after the decision was announced, up from around 98.40 yen.

Commodities, which are sensitive to global demand, continued to be routed. U.S. crude futures were headed to their worst monthly loss ever after slumping $1.7 to $64.24 a barrel on Friday, less than half the record near $150 it had hit in July.

Platinum dropped to $770 an ounce, down from the notional New York close of $817. The metal had hit a life-time high of $2,290 in March.

New Controversial film banned by theatures

Genres:	Comedy
Running Time:	1 hr. 41 min.
Release Date:	October 31st, 2008 (wide)
MPAA Rating:	R for strong crude sexual content including dialogue, graphic nudity and pervasive language.
Distributors:	Dimension Films, MGM Distribution Company, The Weinstein Company

If you're looking forward to seeing Seth Rogen and Elizabeth Banks in director Kevin Smith's new R-rated comedy "Zack and Miri Make a Porno" this weekend and you live in Salt Lake City, you might be out of luck. Utah Jazz and Megaplex Theaters owner Larry Miller has refused to book the film. The chain's spokesman Cal Gunderson expressed concerns about the film with The New York Post, citing the film's "graphic nudity and graphic sex" and that it was "too close to an NC-17."

The company's standards seem a little odd considering that the chain had no problems screening ultra-violent fare like "Saw V," which features beheadings and explicit self-mutilation. When asked why Megaplex Theaters did not object to the gory horror sequel, Gunderson had no comment.

Furthermore, the company's decision might make sense if "Zack and Miri Make a Porno" were in fact pornographic. Instead, Kevin Smith's surprisingly tame and sentimental movie has a few flashes of nudity, a handful of love scenes played mostly for laughs, and a whole lot of foul language. In fact, the film's raunchiness level is comparable to that of "The 40-Year-Old Virgin", "Knocked Up" and "Sex Drive," all of which screened at Megaplex theaters.

It has been a difficult road for Kevin Smith's film, but it is not the first time he has encountered resistance to his frank and bawdy sense of humor. His first film "Clerks" was originally rated NC-17 for language, and his religious comedy "Dogma" sparked protests from Catholic groups. For "Zack and Miri," he again was forced to appeal an NC-17 rating with the MPAA, a teaser trailer had to be removed from his website, and the battle over the poster resulted in a design where the stars only appear as stick figures.

So what's the problem with this movie? The word "Porno" in the title. Aside from Larry Miller's theater chain, fifteen newspapers along with several TV stations and billboard owners have been refusing to promote the flick across the country because of that word. As Philadelphia deputy mayor Rina Cutler said in a phone interview with The Wall Street Journal, "If they want to call the movie 'Zack and Miri,' that's fine, but Zack and Miri cannot make a porno on my bus shelters."

This isn't the first time Miller's company caused controversy by banning a movie. In early 2006, Miller pulled Oscar-nominated movie "Brokeback Mountain" from the screens when he learned that the film was a gay love story between two cowboys. He later stated that he regretted that decision.

As a footnote to this story, this past weekend an audience full of children and pre-teens expecting to see the G-rated "High School Musical 3" at one of Miller's theaters in South Jordan, UT were surprised when the beginning of the R-rated "Sex Drive," which features nudity and swearing, was shown accidentally. But at least they didn't see Seth Rogen in his underwear.

"Zack and Miri Make a Porno" opens everywhere (almost) on Friday.

Stocks up on GDP report in relatively calm session

NEW YORK – Wall Street showed some welcome signs of stability Thursday, taking a downbeat gross domestic product report in stride and driving the Dow Jones industrial average up nearly 190 points in relatively calm trading. Even the last half-hour of the session, lately a period of turbulent activity, was comparatively quiet.

The market that a week ago was reeling from fears about recession was more composed after the Commerce Department's report that GDP fell at an annual rate of 0.3 percent during the third quarter — its worst showing in seven years. Analysts expected a 0.5 percent decline in GDP, the broadest measure of economic growth or contraction, but while the report was better than expected, it still pointed to an economy that is shrinking.

It's premature to say the market's volatility is over — most analysts expect trading to remain erratic for many months, and some believe investors will eventually test the lows that were reached on Oct. 10, when the Dow traded as low as 7,882.51. But Thursday's trading session was the most placid in weeks, a sign that the market might be in the process of bottoming, analysts say. The Dow was only briefly in negative territory, and traded in a range of less than 300 points — well below the 400- and 500-point swings that have become commonplace.

"It does look like the market is taking a tentatively better tone today," said Alan Gayle, senior investment strategist, director of asset allocation for RidgeWorth Capital Management. "Pessimism and skepticism have become the dominant mode of thinking. And that's usually when I think that the market is more ripe for a rebound."

The market did not erupt into frantic buying or selling in the last 30 minutes — a move that has become almost expected at the end of every session as big funds tried to raise cash to meet investors' calls for their money back, or rushed to cover their short positions. The last hour saw the Dow move in a range of 206 points, compared with a 370-point swing in the last quarter-hour of Wednesday's session.

Even though corporate earnings reports and outlooks have not been strong in recent weeks, there is a growing sense that business is not at a standstill. On Thursday, Exxon Mobil Corp. adhered to its five-year capital spending forecast, a day after Starbucks Corp.'s CEO Howard Schultz said it appears the coffee retailer's store traffic may have already bottomed out. And CVS Caremark Corp. said Thursday its third-quarter earnings rose 7 percent as its retail pharmacy revenue improved.

"There's the idea that life goes on, and will go on," said Richard E. Cripps, chief market strategist for Stifel Nicolaus, noting that the daily trading range Thursday for the Standard & Poor's 500 index was about half its October average. "The market sort of inhaled, and it was waiting to exhale — and you're seeing that now."

The Dow rose 189.73, or 2.11 percent, to 9,180.69.

Broader stock indicators also finished higher. The S&P 500 index rose 24.00, or 2.58 percent, to 954.09, while the Nasdaq composite index rose 41.31, or 2.49 percent, to 1,698.52.

The Russell 2000 index of smaller companies rose 23.30, or 4.75 percent, to 514.18.

Advancing issues outnumbered decliners by about 5 to 1 on the New York Stock Exchange, where consolidated volume came to 6.06 billion shares, down from 7.01 billion shares on Wednesday.

The Dow is still down 15 percent for the month of October, following the mid-September bankruptcy of Lehman Brothers Holdings Inc. that contributed to a freeze in the credit markets, and in turn, devastating losses on Wall Street.

While Thursday's move was not as large and immediate a boost to people's stock portfolios as Monday's 889-point advance in the Dow, analysts were more encouraged by Thursday's 189-point gain, saying it displayed less frenzy, and more deliberation and caution.

Another sign of a calmer stock market: Wall Street's fear gauge, the Chicago Board Options Exchange Volatility Index, or VIX, dropped to 62.90 from 69.96 on Wednesday and Monday's near-record level of 80.06. The VIX, which normally trades below 50, tracks options activity for the companies that make up the S&P 500.

Still, the credit markets showed signs that investors are still quite cautious, with short-term government debt still in demand. The yield on the three-month Treasury bill, regarded as the safest investment around and an indicator of investor sentiment, fell to 0.37 percent from 0.55 percent Wednesday. A drop in yield indicates an increase in buying. Meanwhile, the yield on the benchmark 10-year Treasury note rose to 3.97 percent from 3.86 percent late Wednesday.

Wall Street is likely to remain worried for some time about how much the economy will slow and whether the stock market's pullback adequately accounts for the an ancipated ongoing drop in corporate profits. If companies' outlooks for the coming quarters are more negative than the market expects, another wave of volatility and selloffs could follow.

But according to Michael Strauss, chief economist at Commonfund, investors were relieved that the GDP figures weren't worse and that, more broadly, investors are drawing some confidence from the government's array of efforts to revive the credit markets as boding well for a weak economy. On Wednesday, the Federal Reserve lowered the key federal funds rate by a half-point to 1 percent in an effort to make borrowing cheaper and, in turn, boost spending.

"I think it's sort of, 'What do you have to do to get someone back from cardiac arrest?' You have to shock them pretty hard and sometimes you have to shock them a couple of times. I think that's what going on here," Strauss said, referring to steps like the Fed's rate cuts and government cash injections in banks, which began this week.

Strauss contends the programs, most of which have yet to take effect, are creating some appetite for stocks that have been pounded down this month.

"I think we're seeing that transition from 'don't buy' to 'maybe we buy something,'" he said.

On Thursday, the dollar was mixed against other major currencies, while gold prices fell.

Light, sweet crude fell $1.54 to settle at $65.96 per barrel on the New York Mercantile Exchange.

Overseas, Japan's Nikkei stock average jumped 9.96 percent. Britain's FTSE 100 rose 1.16 percent, Germany's DAX index rose 1.26 percent, and France's CAC-40 rose 0.15 percent.

Oil drops over 2 percent as U.S. economy shrinks

NEW YORK (Reuters) – Oil fell more than 2 percent on Thursday as weak U.S. economic data stirred concerns demand could plummet further.

The U.S. economy shrank at an annual rate of 0.3 percent in the third quarter, the sharpest contraction in the world's largest economy for seven years. Businesses cut investment and consumers slashed spending at rates not seen for 28 years.

"The GDP numbers made traders rethink whether the economy was going to be strong enough to support oil demand," said Phil Flynn, analyst at Alaron Trading.

U.S. crude settled down $1.54 at $65.96 a barrel, after trading up to $70.60 earlier. London Brent crude settled $1.76 lower at $63.71.

Oil has more than halved its record high of $147.27 from July and is down 30 percent in October alone, on track for its biggest-ever monthly drop as the economic crisis continues to batter demand in the United States and other major consumers.

U.S. oil demand in August was revised down by 4.8 percent from the EIA's early estimate of 20.242 million bpd to the agency's final demand number of 19.267 million bpd, and was 8.4 percent less than demand of 21.035 million bpd a year earlier.

U.S. stocks gained on Thursday, buoyed by hopes that interest rate cuts by global central banks, including the U.S. Federal Reserve, will help stave off a prolonged downturn.

The U.S. Federal Reserve cut interest rates by half a percentage point on Wednesday, taking its target for overnight bank lending to 1 percent in an attempt to revive the sagging economy.

China also cut interest rates on Wednesday, kicking off what is expected to be a global round of rate cuts. Norway, Taiwan and Hong Kong have also cut rates.

The Fed cut pushed the dollar lower on Wednesday, making dollar-priced commodities like oil cheaper and more attractive for holders of other currencies. But the dollar rose on Thursday amid month-end book squaring by investors.

Oil drew some support from OPEC's decision last week to cut output by 1.5 million barrels per day, or about 5 percent, to prop up prices and hints that it might further reduce supply.

Nigeria's state oil company said in a statement it would reduce crude oil export volumes by 5 percent in November and December because of the OPEC cutback.

Members of the cartel have said they could cut output again to support prices.

Venezuelan Oil Minister Rafael Ramirez said on Thursday OPEC should cut oil output by 1 million barrels per day -- possibly before its next scheduled meeting in December -- and should set a minimum price target of $70 or $80 a barrel.

McCain struggles to gain ground on Obama in Ohio

WASHINGTON – With the presidential race in its final days, Republican John McCain campaigned across Ohio, struggling to gain ground against Democrat Barack Obama in a state that the Republican must win to have a chance of capturing the White House.

With just five days to go before the election, Obama sought to expand his lead in the polls by campaigning against McCain in states that have voted Republican in recent elections, including Florida, Virginia and Missouri.

McCain meanwhile spent a day riding a campaign bus through a single, critical swing state, Ohio, because if he loses there, he will have almost no chance of getting the 270 electoral votes he needs to win the presidency.

McCain says he relishes the role of underdog, and has pulled off come-from-behind wins in the past. He spent part of Thursday in an Ohio town called Defiance, and during the day blasted the media's skeptical assessment of his chances in Tuesday's election.

"The pundits have written us off, just as they've done several times before," he said. "We're a few points down, but we're coming back."

The latest national poll released Thursday, the CBS-NY Times national poll, put Obama and Joe Biden at 52 percent, McCain and Sarah Palin at 39 percent. It had a margin of error of plus or minus 3 percent.

Obama, who spent millions blanketing the television networks with a paid political appeal Wednesday night, continued to hammer home his message that the U.S. needs to change course.

"When the polls close on Tuesday, you don't want to say to yourself, 'Here's something I didn't do, here's an argument I didn't make, here's a hand I didn't shake,'" Obama said in an interview with ABC television, broadcast Thursday.

By most independent evidence, on the Thursday before Election Day the race was Obama's to lose.

National polls showed the Democrat with a substantial lead nationwide, and he was rated the favorite in a half-dozen states that sided with President Bush in 2004. Surveys showed him in close races in three more.

Two new polls released Thursday showed the candidates tied in the once reliably Republican state of Indiana.

Obama, who is seeking to become the nation's first black president, has raised hundreds of millions of dollars more than McCain.

And he has used that advantage to draw votes in traditionally Republican areas, forcing McCain to spend precious time and money defending his home turf.

Obama's campaign has approached Illinois Rep. Rahm Emanuel about possibly serving as White House chief of staff, Democratic campaign officials said Thursday, speaking on condition of anonymity.

After spending part of Thursday in Florida and Virginia, Obama was headed for a rally in Columbia, Missouri as part of his political endgame.

Missouri, in the Midwest, is considered a political bellwether for the rest of the country. Voters there have voted for the winner in every U.S. presidential contest since 1956.

The Republican vice presidential candidate, Sarah Palin, also was in Missouri on Thursday. She spoke in the Mississippi River city of Cape Girardeau, where she said Obama would be an "untested Commander in Chief." She described herself and McCain as outsiders who would bring reform and help get the economy back on track.

Obama's vice presidential candidate, Joe Biden, appeared Thursday in an area of Missouri hit hard by layoffs at a local Chrysler automotive plant, and mocked Palin and McCain for calling themselves political mavericks.

"You cannot call yourself a maverick when all you've been for the last eight years is a sidekick," Biden said. "They are the Bush administration's sidekicks."

Obama on Thursday also sought to shackle McCain to the policies of President Bush, whose popularity has plummeted as the wars in Iraq and Afghanistan have dragged on and the U.S. economy has stumbled.

The candidate compared the White House to a car, and said McCain was waiting to take the wheel from Bush and continue to steer the country down a dead-end.

"After nine straight months of job losses, the largest drop in home values on record, wages lower than they've been in a decade, why would we keep driving down this dead-end street?" Obama said.

As evidence, Obama pointed to federal data released Thursday showing that the economy — the world's largest, generating about one fifth of global gross domestic product — shrank in the third quarter of the year.

U.S. consumers, meanwhile, cut back on their spending by the biggest amount in 28 years.

McCain, in Ohio, also seized on new data — in this case reports of record profits by Exxon Mobil Corp. — to point out that in the U.S. Senate Obama voted for new tax breaks for the oil industry.

"I voted against it," the Arizona Republican said. "When I'm president, we're not going to let that happen."

McCain was likely referring to Obama's 2005 vote on a Republican-crafted energy bill. Obama and other Democrats supported the bill after major tax breaks for alternative energy and conservation were added.

Both campaigns have invested heavily in turning out early voters, with Obama expected to reap the most votes.

According to Dr. Michael P. McDonald of George Mason University, 17.5 million Americans have already cast ballots under provisions for early voting, about 14 percent of the 124 million cast in the 2004 elections.

But the campaign has generated such intense interest that some experts are still predicting long lines at the polls on election day.

Officials in North Carolina said roughly 30 percent of all registered voters had already cast ballots — about 1.7 million in all. But the Board of Elections has ordered the state's 100 counties to keep longer voting hours.

Both Republicans and Democrats are voting early. But officials in Iowa, Florida, Colorado, New Mexico and Nevada as well as North Carolina said more Democrats that Republicans had cast ballots, in some cases by lopsided margins.

The political attacks on Obama have intensified as the election has approached.

An automated phone call blitz by McCain's campaign in Illinois is trying to revive the issue of Obama's ties to a convicted felon, claiming the Democrat hasn't fully explained the relationship.

Palin says Obama infomercial short on specifics

ERIE, Pa. – Republican vice presidential candidate Sarah Palin said Thursday that Democrat Barack Obama offered few national security specifics in the infomercial he broadcast the night before, accusing him of trying to "soften the focus" in the campaign's final days.

"In times of economic worry and hardship — crisis that we're in right now — someone is attempting to put those concerns aside on Election Day — national security issues," Palin told about 6,000 people at a convention center rally.

The Alaska governor said Obama had "wrapped his closing message in a warm and fuzzy scripted infomercial intended to soften the focus in these closing days. He's hoping that your mind won't wander to the real challenges of national security, challenges that he isn't capable of meeting."

She said Republican presidential candidate John McCain is ready for that challenge.

Obama spent about $4 million on a half-hour campaign commercial broadcast Wednesday night on several network and national cable stations.

Palin also said congressional Democrats want sharp cuts in military spending, but that now is not the time to do that.

"We're fighting two wars ... They think it's the perfect time to radically reduce defense spending. What are they thinking?" Palin said.

Palin received a smattering of boos when she said she was glad to be in the home state of the World Series-champion Philadelphia Phillies. Northwestern Pennsylvania baseball fans favor the Cleveland Indians or Pittsburgh Pirates.

But a Phillies reference later in Williamsport in central Pennsylvania got a better reception. Palin spoke at Bowman Field, home of the Phillies' minor-league affiliate, the Williamsport Crosscutters.

"I'm sure you're all pretty doggone proud of the world champion Phillies," she exclaimed to the delight of the crowd that filled the 4,200-seat facility. Thousands more surrounded the stage set up in the middle of the infield.

And in criticizing Obama's leadership credentials, Palin also took aim at his nomination acceptance speech at Invesco Field in Denver, which drew more than 80,000 people.

"The rousing speeches of our opponent can fill a stadium, but cannot make this country safe," said Palin, bundled up in a full-length coat and scarf as temperatures dipped into the 40s.

Earlier in Erie, former Gov. Tom Ridge introduced Palin but mostly spoke of McCain, calling his fellow Vietnam veteran a man of "great integrity and great character, two absolute necessities and character that we need in the president of the United States."

"Security and prosperity go hand in hand" and McCain and Palin would deliver, Ridge said.

Ridge recently told the Pittsburgh Tribune-Review that the presidential race in his state would have been different if McCain had chosen him as a running mate. Most polls show Obama leading McCain in Pennsylvania, which has 21 electoral votes.

"I think we'd be foolish not to admit it publicly," Ridge said, although he added that McCain had made a bold choice by selecting Palin.

Consumer cut in spending the most since 1980

WASHINGTON – Scared and out of money, Americans stopped buying everything from cars to corn flakes in the July-September quarter, ratcheting back spending by the largest amount in 28 years and jolting the national economy into what could be the most painful recession in decades.

With retailers bracing for a grim holiday buying season, the economy isn't just slowing; it's actually shrinking, the government confirmed Thursday. It reported that the nation's gross domestic product declined at an annual rate of 0.3 percent in the year's third quarter and consumers' disposable income took its biggest drop on record.

In simpler words, "The train went off the tracks," said Brian Bethune, economist at IHS global Insight.

Wall Street took comfort in the fact that it wasn't even worse. The Dow Jones industrials rose 190 points.

But economists say tougher times are still ahead. Believing consumers are cutting back even more right now, they predict a much larger economic decline — anywhere from a 1 to 2 percent rate — during the current October-December period. That would meet a classic definition of a recession — two straight quarters of shrinking GDP.

Not that there's any real doubt now.

Clobbered by pink slips, shrinking nest eggs and falling home values — consumers are holding ever tighter to their wallets. The new report said Americans' disposable income fell at an annual rate of 8.7 percent in the quarter, the largest in records dating back to 1947.

The dismal news came just days before the nation picks the next president. Whether Democrat Barack Obama or Republican John McCain wins the White House, he will inherit a deeply troubled economy and a record-high budget deficit that could cramp his spending plans.

Each side said the new figures supported its political case.

"The decline in GDP didn't happen by accident — it is a direct result of the Bush administration's trickle down, Wall Street first, Main Street last policies that John McCain has embraced for the last eight years," Obama said. He pledged to provide tax relief to middle class families and help people facing foreclosure.

Pointing to the economy's sad state, Doug Holtz-Eakin, senior policy adviser for the McCain campaign, shot back that "Barack Obama would accelerate this dangerous course." McCain said his tax cuts, free-trade policies and help to struggling homeowners would help turn things around.

More than in recent recessions, consumers — the lifeblood of the economy — are bearing the brunt of the country's housing, banking and other ailments. The third-quarter decline in their spending was the first in 17 years, and the 3.1 percent annualized cutback was staggering — the most since the spring of 1980 when the country was in the grip of what some call the worst downturn since the Great Depression.

Walloped by such a huge pullback, the economy toppled into negative territory.

The latest reading on GDP, which measures the value of all goods produced within the United States, showed a rapid turn from the 2.8 percent growth rate logged in the second quarter. The new figure was the worst since the 1.4 percent rate of decline in the third quarter of 2001, when the nation was suffering through its most recent recession.

Democrats on Capitol Hill are pushing for another economic stimulus package and are weighing whether to hold a lame duck session before the new president takes office.

Under attack from Democrats and Republicans alike, the White House defended giving billions of bailout dollars to banks that now are rewarding shareholders and executives — or even buying other banks — rather than making loans to consumers and businesses.

Ed Lazear, chairman of the Council of Economic Advisers, said the government is keeping close tabs on banks' use of the money, but he also said normal activities such as paying performance-related salaries or distributing dividends are allowed under the law Congress passed.

White House press secretary Dana Perino said that "not only rich people get dividend payments," which can form a significant portion of income for retirees and mutual funds.

A collapse of the housing market and locked-up lending have produced the worst financial crisis to hit the country in more than 70 years.

To cushion the fallout, the Fed slashed interest rates on Wednesday by half a percentage point to 1 percent, a level seen only once before in the last half century.

Fed Chairman Ben Bernanke has warned that the country's economic weakness could last for some time — even if the government's unprecedented $700 billion financial bailout package and other steps do succeed in getting financial and credit markets to operate more normally.

"As of now, most forecasts indicate that we will experience a serious recession, perhaps comparable to the recession of the early 1980s, but nothing like the Great Depression," said Simon Johnson, former chief economist to the International Monetary Fund and senior fellow at the Peterson Institute for International Economics. During the 1980-1982 recession, unemployment topped 10 percent.

Other analysts, including Mark Zandi, chief economist at Moody's Economy.com, predicts the downturn will be much more severe than the 2001 and 1990-1991 recessions but not as bad — in terms of unemployment or lost growth — as the 1980s one.

The unemployment rate, now at 6.1 percent, could hit 8 percent or higher next year.

The Labor Department said Thursday that new claims for unemployment benefits last week held steady at 479,000, an elevated figure that continued to point to troubles in the jobs market.

In the third quarter, consumers cut back on purchases of cars, furniture, household appliances, clothes and almost everything else.

Businesses cut back, too, trimming spending on equipment and software at a 5.5 percent pace, the most since the first quarter of 2002. And home builders slashed spending at a 19.1 percent pace, marking the 11th straight quarterly cutback.

Slower growth for U.S. exports — reflecting less demand from overseas buyers who are coping with their own economic problems — also factored into the weak GDP report. Exports grew at a 5.9 percent pace in the third quarter, less than half the second quarter's 12.3 percent rate.

Syria hardens stance after deadly US raid

DAMASCUS, Syria – Syria threatened Wednesday to cut off security cooperation along the Iraqi border if there are more American raids on Syrian territory, and the U.S. Embassy announced it would close Thursday because of a mass rally called to protest a deadly weekend commando attack.

Tens of Iraqi refugees in Syria protest against a US raid on a Syrian village at Sukkeriyah, 8 km from the Iraqi border, that killed eight people, in downtown Damascus on Wednesday Oct. 29, 2008. The protestors chanted anti-US slogans and carried Iraqi flags. Syria's deputy foreign minister said Wednesday that Damascus wants America and Iraq to apologize to Syria for a U.S. commando raid mounted from Iraq that killed eight and pledge not to repeat it again.

(AP Photo/Bassem Tellawi)

Thousands were expected to participate in the government-sanctioned protest. Though authorities usually keep Syria under tight control and Americans have generally been welcomed, violence against U.S. and European interests at protests has erupted in the past.

"The U.S. Embassy will be closed on Oct. 30th due to past demonstrations which resulted in violence and significant damage to U.S. facilities and other embassies," the embassy said on its Web site.

It also said an American school in the Syrian capital would temporarily shut its doors Thursday and warned U.S. citizens in Syria to be vigilant.

The Syrian government already ordered the closure of the school and an American cultural center linked to the embassy. In Washington, State Department spokesman Robert Wood said Syria formally notified the U.S. that the cultural center should shut down immediately and the school by Nov. 6.

"We are looking at how to respond," Wood said, adding that in the meantime: "We expect the Syrian government to provide adequate security for the buildings in which the American Cultural Center and Damascus Community School are housed."

Earlier, the Syrian government demanded that Washington apologize for Sunday's cross-border helicopter strike by American special forces that killed eight people. U.S. military officials said the raid killed a top al-Qaida in Iraq operative who was about to conduct an attack in Iraq.

Deputy Foreign Minister Fayssal Mekdad said Syria wants assurances Iraqi territory will not be used again to raid Syria.

"We have demanded that an investigation be conducted and that Iraq not be used for attacks against Syria. Otherwise, this would torpedo all agreements reached during the Iraq neighbors' meetings and bilateral agreements," he told The Associated Press in an interview.

Iraq also demanded Wednesday that a crucial security deal under discussion with the U.S. must include a ban on American troops using Iraqi territory to attack neighboring countries.

Though Syria has long been viewed by the U.S. as a destabilizing country in the Middle East, attacks on its territory are rare and Damascus has been trying in recent months to change its image and end years of global seclusion.

Syrian President Bashar Assad has pursued indirect peace talks with Israel and says he is open to direct talk as early as next year. Syria also has agreed to establish diplomatic ties with Lebanon — a country it used to dominate — for the first time in their history.

But the U.S. still accuses Syria of doing too little to prevent foreign fighters from crossing into Iraq. Syria says it is doing all it can to safeguard the long, porous border.

Despite its opposition to the U.S.-led invasion of Iraq, Syria has moved to improve relations with Baghdad, sending an ambassador earlier this month for the first time in 25 years.

Mekdad demanded the U.S. and Iraq apologize for the attack and asked for American compensation.

"What is required of the American government is to confess to this aggression and not be cowardly," he said.

There has been no formal acknowledgment of the raid from the United States. But U.S. officials, speaking on condition of anonymity, have said the target was Badran Turki al-Mazidih, a top al-Qaida in Iraq figure who operated a network of smuggling fighters across the border. The Iraqi national also goes by the name Abu Ghadiyah.

Mekdad rejected the U.S. reports and insisted all those killed were Syrians.

"The allegation that this person was killed is a false claim. Therefore, a search for him by world intelligence agencies, including Syria's, should continue," he said.

With tensions between the U.S. and Syria on the rise, the U.S. Embassy advised Americans to avoid Thursday's demonstrations and review their personal security. Past protests have occasionally turned violent.

In 1998, small groups trashed the U.S. ambassador's residence and entered the American and British cultural centers in Damascus to protest U.S.-British airstrikes on Iraq. In 2006, thousands protesting newspaper caricatures of Islam's Prophet Muhammad burned the Danish and Norwegian embassies in Damascus.

Despite the warning, some Americans living in Syria said they were not too worried.

"I feel that it might be tough for me to say that I am an American, for a while, but I don't have any concerns for my personal safety," said Kate Alberswerth, a 24-year-old New York native who is studying Arabic in Damascus.

Japan PM set to unveil economic package, hold off polls

TOKYO (AFP) – Japan's Prime Minister Taro Aso was set Thursday to unveil a new multibillion-dollar package to help Asia's largest economy weather the global economic crisis as he puts off high-risk elections.

Aso scheduled a news conference for Thursday evening where he was expected to say he will hold off on elections until next year. The opposition, which is ahead in some polls, has pushed Aso to call a vote as soon as November.

"Policies should come before politics. That's the answer," Aso told reporters Tuesday when asked about elections.

Japanese media, quoting unnamed sources, said Aso would announce an economic package worth five trillion yen (51 billion dollars), of which two trillion yen would consist of benefits sent back in some form to households.

The package will also reportedly include a cut in tolls on expressways and an expansion of tax-exempt housing loans -- hoping to boost the struggling property market.

The stimulative package would be the first drafted under Aso, an advocate of government spending to boost the economy, who took over a month ago in the midst of global economic turmoil.

The package would be almost three times larger than a first economic plan worth 1.81 trillion yen, which was announced in late August by Aso's predecessor Yasuo Fukuda to ease the impact of soaring commodity prices.

Parliament approved the package earlier this month, with the opposition supporting it. But the opposition has warned that further legislation will not have such an easy ride through parliament if Aso refuses to call elections.

General elections must be held by September 2009.

Aso replaced the unpopular Fukuda with a mission to salvage the fortunes of his Liberal Democratic Party (LDP), which has been in power for all but 10 months since 1955 but is reeling from corruption scandals and a slowing economy.

Aso, a 68-year-old blue-blood with a flamboyant campaign style, is the fourth LDP prime minister since 2006.

In a break with his predecessors, Aso puts a higher priority on stimulating the economy than on reducing Japan's ballooning public debt, which is the highest among industrialised nations.

To bankroll the economic package, Aso is expected to tap into reserves in the debt-ridden nation's special budget instead of issuing new bonds, the Asahi Shimbun reported.

Japan's economy suffered its worst contraction in seven years in the second quarter of this year and many analysts believe it is already in recession, which is usually defined as two straight quarters of negative growth.

While Japan's banks have escaped comparatively unscathed from the financial crisis , many companies' profits are plunging due to the soaring yen, which makes their exports less competitive.

Along with Aso's new package, the Bank of Japan is widely expected to cut its already super-low interest rates on Friday.

The move marks a sea-change for the central bank, which has aimed to tighten credit since March 2006 when it ended an unprecedented policy of keeping interest rates at virtually zero.

US cuts rates; US, IMF new liquidity windows; Japan stocks soar

WASHINGTON (AFP) – Japan's Nikkei stock index has surged more than six percent in afternoon trade on Thursday as investors welcomed a weaker yen and an interest rate cut by the US Federal Reserve.

The US Federal Reserve building is seen in Washington, DC. The US Federal Reserve cuts its key lending rate half a point Wednesday to 1.0 percent in the latest move to ease a credit crisis that is strangling the US economy.

(AFP/Karen Bleier)

The benchmark rose 501.62 points, or 6.11 percent, to 8,713.52, mirroring gains across Asia.

News of the gains in Asia trade come on the back of the US Federal Reserve announcement that it had sliced its key interest rate another 0.5 percentage points to 1.0 percent as signs emerged of thawing credit markets around the world.

The Fed's expected action came after China also chopped its benchmark one-year deposit rate by 27 basis points to 3.60 in a bid to spur economic growth, and expectations rose for rate cuts in Japan and Europe.

"Downside risks to growth remain" for the world's biggest economy, said the Fed's rate-setting committee in announcing the cut.

Ian Shepherdson, chief US economist at High Frequency Economics, said the Fed produced "a very downbeat statement, with all mention of upside inflation risks expunged from the record."

Signs of global financial stress were still everywhere.

The International Monetary Fund created a new short-term liquidity facility for countries battered by the crisis.

The IMF executive board said the emergency tool was "to establish quick-disbursing financing for countries with strong economic policies that are facing temporary liquidity problems in the global capital markets."

"Exceptional times call for an exceptional response," IMG Managing Director Dominique Strauss-Kahn said.

The US Fed announced its own temporary "swap" facilities with central banks in Brazil, Mexico, South Korea and Singapore to help those countries ease a credit squeeze.

Each would be provided up to 30 billion dollars in liquidity, it said, "in response to the heightened stress associated with the global financial turmoil, which has broadened to emerging market economies."

"The currency swap deal with the US Fed will help stabilize the local financial market," Bank of Korea governor Lee Seong-Tae told reporters.

"The swap deal will also contribute to stabilizing the currency market."

In Brussels, the European Commission moved to nearly double the maximum amount of EU aid that can be given to member states facing economic trouble to 25 billion euros.

And British finance minister Alistair Darling confirmed the relaxation of long-standing fiscal "golden rules" restricting government debt to under 40 percent of Gross Domestic Product (GDP).

"To apply the fiscal rules in a rigid manner today would be perverse. We would have to take money out of the economy, exacerbating an already difficult situation," he said in London.

But the collapse of a budget airline in Europe and a plunge in profits for Japan's Sony Corp., underlined the scale of the task facing policymakers.

Sony said its operating profit plunged 90 percent in the second quarter, hit by a surging yen, a weak global economy and intense price competition.

Denmark-based low-cost carrier Sterling Airways said it would file for bankruptcy because its cash-strapped Icelandic owner was unable keep it airborne.

German titan Lufthansa also reported a 75-percent nosedive in net profit, blaming high fuel costs and weakened sales.

Hungary meanwhile became the latest recipient of a 20 billion euro (25 billion dollar) IMF-coordinated bailout. The Hungarian market surged 8.2 percent and the forint currency rallied after the announcement of the rescue package.

Lawmakers in Ukraine approved legislation demanded by the IMF in exchange for an emergency loan worth 16.5 billion dollars.

And Swedish MPs voted through a 1.5 trillion kronor (195 billion dollar) plan to further shore up Sweden's financial sector.

Stockmarkets mostly closed higher: Tokyo's Nikkei main index soared 7.74 percent by the close, Australian shares were up 1.3 percent and Hong Kong's Hang Seng ended 0.8 percent higher.

In Europe the FTSE 100 index rose 8.05 percent and the CAC gained 9.23 percent. But the Frankfurt DAX fell 0.31 percent, dragged down by Volkswagen, whose shares had surged on Monday and Tuesday on news that Porsche had boosted its stake.

In the Americas, while the Dow and S&P 500 were slightly off, the tech-heavy Nasdaq improved 0.47 percent. Most Latin America markets rose, with Brazil's battered Bovespa higher by 4.37 percent.

Mega-tsunami hit southeast Asia 700 years ago

HONG KONG (Reuters) – A mega-tsunami struck southeast Asia 700 years ago rivaling the deadly one in 2004, two teams of geologists said after finding sedimentary evidence in coastal marshes.

A person drives past a tsunami hit building at Peraliya in Hikkaduwa, December 23, 2007.

(Buddhika Weerasinghe/Reuters)

Researchers in Thailand and Indonesia wrote in two articles in Nature magazine that the tsunami hit around 1400, long before historical records of earthquakes in the region began.

"Tsunamis are something we never experienced before and after 2004, people thought it was something we would never experience again," Kruawun Jankaew of Thailand's Chulalongkorn University told Reuters by telephone.

"But from this, we are able to identify that the place has been hit by a mega tsunami in the past. So even though it is infrequent for this part of the world, it still happens and there is a need to promote tsunami education for coastal peoples."

The 2004 tsunami left 230,000 people either dead or missing across Asia, from Sri Lanka and India to Thailand, the Maldives and Indonesia. More than 170,000 of these victims were in Aceh province in Indonesia.

Jankaew's team studied a grassy plain on Phra Thong, an island north of Phuket in Thailand, where the 2004 tsunami reached maximum wave heights of 20 meters (65 ft) above sea level.

A separate team led by Katrin Monecke from the University of Pittsburgh looked at the sedimentary records on coastal marshes in Aceh, where the waves reached 35 meters.

They explored low areas between beach ridges called "swales" -- which are known to trap tsunami sand between layers of peat and other organic matter -- and discovered a layer of sand beneath the most recent layer (2004), from 600 to 700 years ago.

"Depending on where the depression is, it (the layer of the 1400 sand) can be 10 cm. But on higher ground, it can be two to five cm. Organic materials like bark and leaves, which contain carbon, were used for dating," Jankaew said.

The scientists are now trying to find out the scale of that catastrophe 700 years ago.

"We will look at the thickness and grain size of the sediment and we can calculate how fast the tsumani was, how far inland it went, and the floor depth," she said.

Jankaew said there are two more layers of sand under the 1400 layer but more studies would need to be done to date these.

Some experts blame the massive loss of lives in 2004 on ignorance of the region's tsunami history.

Very few people living along the coasts recognized natural tsunami warnings, such as the strong shaking felt in Aceh and the rapid retreat of ocean water from the shoreline that was observed in Thailand.

But on an island just off the coast of Aceh, most people safely fled to higher ground in 2004 because the island's oral history includes information about a devastating tsunami in 1907.

Stocks surge, yen falls as risk taking improves

HONG KONG (Reuters) – Asian stocks rose for a third day on Thursday, led by a 12 percent surge in South Korea, on international efforts to provide liquidity to emerging markets and global prospects of lower borrowing costs.

A woman walks past an image of the Japanese yen's exchange rate against the U.S. dollar projected on a wall at a foreign exchange retail trading company in Tokyo October 29, 2008.

Commodity prices jumped and the yen weakened in the wake of the Federal Reserve's cut in rates to the lowest since June 2004, to soften the blow of a potentially deep recession.

China, Hong Kong, Norway and Taiwan all delivered cuts of their own, and pressure mounted on the Bank of Japan to reduce rates after it meets on Friday.

The avalanche of government measures taken to increase bank liquidity, including $120 billion of currency swap lines opened between the Fed and four developing economies, and global rate cuts have prompted investors to make room in their cash-heavy portfolios for riskier assets. Credit availability and risk taking are essential to the functioning of the financial system.

"Ongoing policy initiatives from global central bankers and policymakers are finally gaining some traction," said Patrick Bennett, Asia foreign exchange and rates strategist with Societe Generale in Hong Kong.

"Despite the welcome responses to policy actions, risk from slower global growth has not been extinguished and still points to potential underperformance for much of Asia," he said in a note.

Asia-Pacific stocks traded outside Japan climbed for a third day, up 10.2 percent, according to an MSCI index. The last time the index rose for three straight days was in mid June, reflecting the relentless selling that has battered shares. The index is still down 54 percent so far this year.

Investors have snapped up global equities this week on the first sign of improving sentiment, with valuations in some markets at extreme levels. For example, the ratio of prices to book value on Japan's Nikkei share average dropped on Monday to 0.87, the lowest in more than a decade.

The Nikkei rose 8.4 percent, recovering from a 26-year low hit on Tuesday. The weaker yen emboldened investors to buy shares of exporters such as Honda Motor Co and Canon Inc.

South Korea's KOSPI surged 12.5 percent, leading the region higher, after the government established a $30 billion currency swap line with the U.S. central bank. The measure would likely relieve pressure on banks to refinance foreign debt.

Hong Kong's Hang Seng index gained 10 percent, with shares sensitive to fluctuations in commodity prices among the top gainers. CNOOC, China's biggest offshore oil refiner, leapt almost 19 percent.

U.S. stocks mostly fell overnight as a big rally faltered in the last minutes of trading on worries about the weakening corporate profit picture after a news report raised questions about General Electric's earnings outlook.

EMERGING OPTIMISM

The yen weakened on the combination of increasing risk appetite as well as expectations of the first rate cut by the Bank of Japan since the financial crisis broke out more than a year ago.

The euro jumped more than 2 percent to just above 131 yen. The euro hit a 6-1/2-year low below 114 yen last Friday.

The U.S. dollar was trading at 98.30 yen, staying well above a 13-year trough of 90.87 yen hit on trading platform EBS late last week.

Analysts at Morgan Stanley however said they still expected the yen to continue climbing.

"Our view is that yen strength owes more to de-risking and repatriation flows that do not seem to have run their course, yet," they said in a note.

In addition to foreign exchange swaps established between the Fed and central banks in Brazil, Mexico, Singapore and South Korea, the International Monetary Fund in a separate action set up a short-term fund for countries with good track records but in need of capital.

The two measures improved sentiment on emerging markets and helped to propel the Korean won 10 percent higher against the U.S. dollar and cut the cost of protection against a default on Asian government debt.

Emerging markets have been a source of pain for many investors, including hedge funds. Last month, the Credit Suisse/Tremont emerging markets hedge fund index showed a loss of 8.9 percent, the biggest in a decade, exceeding the 6.5 percent decline on the benchmark hedge fund index.

Raw materials prices rose in the wake of the U.S. dollar's sharp decline overnight. U.S. crude futures were up more than $2.00 above $69.73 barrel, having risen about $8 from the lowest level since May 2007 reached on Monday.