Governments rushed out new emergency measures in a desperate bid to staunch underpin confidence on Thursday, rallying shell-shocked markets as the US treasury secretary warned more banks could go under.

Iceland, battling national

bankrutpey, took over the country's biggest bank, the US Federal Reserve pumped another 38 billion dollars into insurance giant AIG while central banks in Asia followed a US and European lead by cutting interest rates.

The European Central Bank meanwhile injected 100 billion

FROM PAGE 1

dollars into the banking system in one day and said it would offer an unlimited amount of euros in one-week loans.

But although the measures brought some calm to the markets, the International Monetary Fund forecast the world economy was now enteringa major downturn.

Iceland's government nationalised Kaupthing, completing a state takeover of the top three banks after Landsbanki and Glitnir were saved over the past week.

As the financial sector dominates the Atlantic nation's economy --weighing in around eight times Iceland’s gross domestic product --the crisis threatens the entire economy and Prime Minister Geir Haarde has warned a recovery will take "years".

Iceland will begin negotiations next week with Russia for a four billion euro emergency loan.

Despite a staggering 700-billion-dollar US bank bailout that cleared Congress last Friday, US lYeasury Secretary Henry Paulson warned more US banks were expected to go under in the United States.

"One thing we must recognise --even with the new Treasury authorities, some financial institutions will fail," he said, adding that the financial chaos had "seriously impacted" the economy.

In another move, the head of the International Monetary Fund, Dominique Strauss-Kahn, said that European Union countries should work together and avoid unilateral steps to fight a global financial crisis.

"Cooperation and coordination in actions is the price of success. All kinds of cooperation have to be recommended."

Unilateral action "has to be avoided, if not condemned," Strauss-Kahn said at a news conference ahead of the annual meetings this weekend of the IMF and World Bank.

"I urge European countries to work together. There's no domestic solution in a crisis like this one," the former French finance minister said.

"I know, having myself served as a financial minister of my country, how difficult it is in the European Union to make consensus and to make decisions. I don't underesti-matetheproblems,"he added.

FED MEASURES

The Fed announced it had authorized a new 37.8-billion-dolIar cash infusion into American Insurance Group, after an 85-billion-dollar loan made available last month had been virtually used up.

The day after western central banks cut interest rates by half a percentage point, it was the turn of Asia to follow their lead. Hong Kong slashed its key rate by a half percentage point, while Taiwan and South Korea also announced cuts.

The crisis measures prompted an

initial market rebound, with the Tokyo Stock Exchange's benchmark Nikkci-225 index rising into positive territory for the first time in a week before closing down 0.5 percent.

Hong Kong's Hang Seng Index rose 2.65 percent in afternoon trade, recovering some of its recent losses.

Early reaction on the markets in Europe was also positive. London's stock market rebounded 2.48 percent in morning trading, French stocks rising 2.09 percent at the start of trading and Frankfurt's DAX openingO.81 percent higher.

Wall Street on Wednesday dropped 2.01 percent after a highly volatile session. The Dow Jones Industrial Average has shed 14.7 percent over the past six trading days.

Justin Urquhart-Stewart, marketing director at Seven Investment Management, said the rate cuts were "exactly what we needed, and reinforces the message this is a coordinated international response to a verydangerous situation".

"Now that we've reached Defcon One in the banking system, thank heavens we're getting the right reaction, because the alternative is unthinkable," he added. Defcon One is the US military's highest level of alert.

Britain's Prime Minister Gordon Brown, who announced an 875-billion-dollar package Wednesday that involved a possible part-nationalisation of several banks, urged European counterparts to follow suit to help begin thawing the global credit freeze.

"This is an issue which affects us all. A concerted approach with national schemes ... would address this problem," he wrote in a letter to French President Nicolas Sarkozy, current EU president which was copied to other EU leaders.

German Finance Minister Peer Steinbrueck said he saw no immediate need to nationalise any of his country's banks but this could change. He said "the German banking sector has been hit badly by the financial crisis but less hard” than other countries, Steinbrueck told the Handelsblatt daily.

"But this might change as uncertainties about future developments are currently much too high."

Speaking on French television, European Central Bank chief Jean-Claude Trichet said "excessive pessimism is ill-advised".

"We all together call upon the market participants who are in this state of intense turbulence, we tell themtocoflect themselves," he said. "There are elements of confidence outthere.'

With top economic policy makers headed toWashington for the annual meetings of the International Monetary Fund and World Bank. Trichet said: "It is very important that we coordinate as closely as possible".