Fears are growing that the financial crisis will mutate into a worldwide recession with leaders calling for new global action to counter slowing economies and market troubles.
As EU leaders gathered for a summit devoted to the financial turmoil, a top US central bank official, backed by new data, said the United States appeared to be in recession.
German Chancellor Angela Merkel said the Group of Eight wealthy nations would hold a special summit before the end of the year. British Prime Minister Gordon Brown called for international talks on radical reform of the world financial system.
Janet Yellen, president of the San Francisco Federal Reserve, said there was "essentially no growth at all" in the world's biggest economy and "growth in the fourth quarter appears to be weaker yet, with an outright contraction quite likely".
US retail sales slumped 1.2 per cent in September, government data showed. The drop was the steepest since August 2005.
Ian Shepherdson, economist at High Frequency Economics, said "there can be no doubt now that the (US) economy is in recession".
Japan's Prime Minister Taro Aso has already said he has "huge fears" for the future of the world's second biggest economy and Merkel said Germany, ranked third, faces a major test of its strength.
"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," Merkel said as she urged parliament to pass a 480 billion euro ($A940 billion) bank rescue package.
"Germany is strong but Germany is going to go through a difficult period," she warned.
Merkel said the Group of Eight and leading developing nations would hold a special crisis summit before the end of the year.
In Brussels, the British prime minister urged fellow EU leaders to unite against the underlying problems behind the crisis.
Brown said financial system has been stabilised but added: "I believe we must now move to stage two ... to make sure that problems that develop in financial systems, problems we know originated in America, do not occur again."
Brown called for a complete overhaul of global financial regulations and institutions, such as the International Monetary Fund (IMF). He said international talks had to start this year.
"It becomes obvious now that we are dealing with global financial markets ... what we do not have is anything other than national or regional supervision," he said.
European Union nations have already committed more than 1.8 trillion euros ($A3.53 trillion) to fighting the crisis by buying bank shares and providing loan guarantees to keep credit markets moving.
The United States has a $US700 billion ($A1.0 trillion) rescue plan and the administration announced that $US250 billion ($A360 billion) from that would be used to take stakes in nine major banks.
US President George W Bush defended his action in response to the crisis and promised the US economy would recover.
"We have taken extraordinary measures because these are extraordinary circumstances," said Bush, who has been put on the defensive by criticism from the right wing of his Republican party that the government is taking too much control of the economy.
"It's very important for the American people to know that the program is designed to preserve free enterprise, not replace free enterprise," he said.
Worries about a worldwide slowdown and the crisis in the money markets have given global stock markets a battering and shares fell again Wednesday.
Wall Street shares slid 1.75 per cent in early trading and Europe's main markets were also sharply lower with London's FTSE 100 falling 5.25 per cent, the Paris CAC 40 4.23 per cent and Frankfurt's DAX 4.72 per cent.
Tokyo was a bright spot in Asia, closing up 1.06 per cent after a record 14 per cent surge but Hong Kong closed down 5.0 per cent.
