Around the world, stock prices nosedived amid growing concern of a looming recession.

Before heading off to an EU summit in Brussels, Dr Merkel urged Germany's lower house of parliament to adopt a 480-billion-euro (S$955 billion) rescue package so as to help restore calm to the financial markets and shield the German economy - the biggest in Europe - from further harm.

It was not just about throwing banks a lifeline but protecting the German economy as a whole, Dr Merkel insisted.

'The state is the sole entity that can restore confidence between the banks, not in the interest of the banks themselves, but in the interests of our citizens,' she said.

Dr Merkel also said Group of Eight world industrial powers would hold a special summit on the financial crisis together with emerging nations, possibly in November.

Britain, Canada, France, Germany, Italy, Japan, the United States and Russia would sit down at the summit with emerging giants such as India and China, she said.

'I explicitly support ... the idea to hold a heads of state and government meeting this year, preferably in November, at which the important G8 nations exchange ideas about a new financial charter,' Dr Merkel told reporters as she arrived in Brussels.

The summit would 'make proposals and make sure that something like this (financial crisis) never happens again,' she said.

As part of its own efforts to shore up financial market confidence, Berlin is offering up to 80 billion euros in fresh capital for banks and 400 billion euros in guarantees in order to jumpstart stalled lending.

There has been grumbling in some of Germany's 16 states over who should shoulder the cost of the bailout plans but it looks likely that the plans will get through parliament by the end of the week nonetheless.

'We're laying down the structures for a market economy with a human face for the 21st century,' Dr Merkel said. 'We're taking drastic action so that what we're now experiencing will not happen again.' Dr Merkel warned that German economic growth would be hit, albeit temporarily.

'We must prepare ourselves for a weakening of growth in Germany. But I'm convinced that the slowdown will not prove a long-lasting one,' she said.

'Germany is strong. But Germany is going to go through a difficult period.'

British Prime Minister Gordon Brown called on his fellow EU leaders to tackle the underlying problems behind the financial crisis.

The first phase of the crisis had been brought to a close with the stabilisation of the financial system, Mr Brown said.

'I believe we must now move to stage two... to make sure that problems that develop in financial systems, problems we know originated in America, do not occur again.' Mr Brown called for a complete overhaul of global financial regulations and institutions, such as the International Monetary Fund (IMF), as the world's economy was now far more interdependent than ever before.

'It becomes obvious, now that we are dealing with global financial markets ... (that) what we do not have is anything other than national or regional supervision,' he said.

EU Commission chief Jose Manuel Barroso insisted that Europe was 'leading the global response. We must continue to do so.

'An urgent priority is to further deepen coordination at international level and specifically with the US,' said Mr Barroso, who is due to hold weekend talks near Washington with US President George W. Bush and French President Nicolas Sarkozy. -- AFP