WASHINGTON/LONDON - THE US government pushed on Saturday to finalise a plan to buy direct stakes in American banks as the International Monetary Fund warned markets could drop another 20 percent in a worst-case scenario.

Global stocks plunged to five-year lows on Friday as panic gripped, with the US S&P index and European stocks suffering their worst week ever, losing around a fifth of their value.

'In a worst-case scenario, governments will need a few more weeks to take the correct measures and the markets could fall another 20 percent. Then, we'll turn around,' the IMF's chief economist Olivier Blanchard was quoted as saying in Italian daily Corriere della Sera.

The world's rich nations vowed on Friday to take all necessary steps to unfreeze credit markets and ensure banks can raise money but they offered no collective course of action to avert a deep global recession.

In a surprisingly brief statement after a 3-1/2 hour meeting, the Group of Seven stopped short of backing a British plan to guarantee lending between banks, something many on Wall Street saw as vital to end growing market panic.

Treasury Secretary Henry Paulson said the US government would buy shares of financial institutions if necessary to halt market turmoil that has wiped out trillions of dollars of wealth and threatens to throw the global economy into major recession.

'We're going to do it as we can do it in a proper way that will be effective. Trust me, we're not wasting time, we're working around the clock,' Mr Paulson said late on Friday after the G7 meeting broke up.

He declined to discuss the size of the US bank equity purchases but said details were being developed quickly.

Analysts said the G7 statement was unlikely to allay the panic that has swept through markets in recent weeks after US investment bank Lehman Brothers tumbled into bankruptcy and triggered a wave of risk aversion that left banks hoarding cash.

'Right now, everybody's scared, they're panicking,' said Mr Mark Waggoner, president of Excel Futures Inc in California.

'Unless they see action, they're still going to panic.'

'Part of the problem is no matter what they (G7) do it's not going to be an instantaneous fix and everybody wants a fix that's immediate,' he added. 'It's just not going to happen.'

The IMF's Blanchard estimated there was about a 50 per cent chance of a recession in the United States and Europe.

Emergency Euro zone, G20 meetings
Leaders of euro zone countries will meet in Paris on Sunday in a new European attempt to coordinate action. The Group of 20, which includes reserve-rich emerging economies such as China and Russia, will meet on Saturday.

EU chiefs are due to hold a regular summit in Brussels on Oct 15, but the ferocity of this week's turbulence persuaded French President Nicolas Sarkozy to summon the 15 states that have adopted the euro currency for emergency talks.

'This meeting will have as its goal to define a joint action plan for euro zone countries and the European Central Bank,' Mr Sarkozy's office said in a statement.

Britain is not a member of the euro zone and so is not invited, an exclusion that may undermine the results.

A meltdown in the risky US subprime mortgage market last year has crippled parts of the global financial system, leaving many banks facing huge losses and making them reluctant to lend to other banks and big customers in case they go bust.

Without credit, world economic growth will collapse.

Investors had hoped the G7 would produce a globally coordinated plan to get money flowing smoothly again.

Borrowing costs spiked this week even after central banks poured hundreds of billions of dollars into markets and cut interest rates in their broadest coordinated action in history.

Investors have pulled a net $43.3 billion (S$64.3 billion) so far in October from US mutual funds investing in equities, while pouring nearly $60 billion into money-market mutual funds.

US plan
Under the US plan, the Treasury will use authority granted by Congress in last week's $700 billion (S$998 billion) financial rescue legislation to buy shares in financial firms in addition to buying some of their distressed assets such as soured mortgages and illiquid securities.

The move would clear some bad assets off the banks' balance sheets, theoretically freeing them up to lend again. Paulson said a two-pronged approach would be more effective.

'We can use the taxpayers' money more effectively and more efficiently, have it go farther and get more for their dollars and more protection if we develop a standardised programme for making and encouraging equity participation,' he said.

Buying direct stakes in struggling banks to recapitalise them could pump huge amounts of money into the system more quickly than the proposal to buy toxic mortgage-related debt, which could be highly complicated and time consuming.

Britain's rescue plan involved injecting 50 billion pounds (S$129 billion) of taxpayers' money into its banks and, crucially, to guarantee interbank lending - a move it urged other countries to adopt. The G7 did not.

Japan's finance minister said his country was also considering injecting capital into banks. -- THOMSON REUTERS