By Daniel Trotta and Kevin Krolicki

U.S. officials called for a "forceful and coordinated" global reaction to the crisis, and U.S. stocks bounced back from a five-year low on signs policymakers were readying new steps to thaw frozen credit markets.

Even after late-day gains, the Dow Jones Industrial Average closed down 3.5 percent on Monday, capping its worst four-day point run since September 2001.

Stock markets in Europe and Asia were also hammered in the first full-day of global trade since the U.S. Congress approved a $700 billion bailout intended reassure markets that help was on the way.

Instead, a crisis that began with the overheated U.S. property market and the $11 trillion U.S. mortgage market was still rocking confidence worldwide.

"The ground underneath our feet is moving like an earthquake," said acting U.S. Treasury Undersecretary for domestic finance Anthony Ryan.

Expectations have built for a rate cut by the U.S. Federal Reserve, possibly as part of a coordinated move with the European Central Bank.

Fed fund futures have priced in a probability of a 75-basis-point cut by the U.S. central bank this month.

Federal Reserve Bank of Dallas President Richard Fisher, considered an inflation hawk, said capital markets were in "semi-panic" and said he was more worried about markets breaking down than upward pressure on prices.

"What I'm more worried about is how dysfunctional the system has become and what we, as the lender of last resort, need to do to encourage the liquidity to flow," he said.

The U.S. Treasury, charged with putting the $700 billion fund to work to buy up bad debt, named Neel Kashkari, a veteran banker from Goldman Sachs, to head the landmark program.

The New York Federal Reserve moved toward establishing a central clearing mechanism for credit default swaps, a form of over-the-counter insurance against bankruptcy blamed by critics for destabilizing the entire financial system.

Other steps aimed at shoring up banks and easing pressure on credit markets could be coming -- a Treasury official said the $700 billion U.S. bailout fund could be used to buy company shares.

A person familiar with the matter also said the U.S. Treasury and Fed could take steps to support the commercial paper market -- a crucial way for corporate borrowers outside the financial sector to raise short-term funds.

Emerging markets, which had gained most from the surging global expansion in the last three years, were sucked into the vortex. Trading was halted in markets as far afield as Brazil and Russia when stocks plunged.

Mexico's peso sank to its weakest level since the currency was allowed to float in the mid-1990s, and stocks plunged.

"We are in a state of panic. Markets are out of control," said Bertrand Delgado, an economist at IDEAglobal who covers Latin America.

The banking upheaval that began on Wall Street has effectively shut down interbank and other loan markets, pushing industrialized countries closer to recession. Conditions remained poor for interbank lending.

Even as Sweden, Austria and Denmark followed Germany's lead by offering blanket deposit guarantees to depositors, investors from Tokyo to London continued to slash risk and positioned themselves for a further tightening of credit.

Oil prices fell below $90 a barrel and have dropped nearly 40 percent from their peak, pushed lower with other commodity prices by worries about a looming recession.

With the U.S. presidential election less than a month away, the campaign remained overshadowed by the debate about how to confront the worst banking crisis since the Great Depression.

"WE DON'T WANT TO RUSH"

In Texas, U.S. President George W. Bush said it would take time to restore confidence in the financial system and to free up credit, telling reporters it was important that the rescue program not waste taxpayer money.

"We don't want to rush into this situation and not have the program be effective," Bush said.

Campaigning in North Carolina, Democrat Barack Obama urged the Bush administration to act quickly. "We've seen that contagion is spreading to all parts of the globe," he told reporters.

On Capitol Hill, lawmakers pressed for an accounting of who was responsible for the financial train wreck.

The disgraced head of Lehman Brothers Holdings Inc told Congress that banking regulators knew exactly how the failed bank was pricing its distressed assets and about its liquidity in the months before its collapse.

Lehman chief executive Richard Fuld, grilled about the failure of his bank and his own pay, said he did not know why the U.S. government chose to help other financial companies but not Lehman as it hurtled toward bankruptcy. "Until the day they put me in the ground, I will wonder," he said. ID:nN06513706

In Chicago, former U.S. Securities and Exchange Commission chief Richard Breeden called the crisis "a 900-foot tsunami" and chided Treasury Secretary Henry Paulson for wanting, as recently as a year ago, to reduce regulation.

FOCUS ON BANKS

Bank of America Corp, the largest U.S. bank, posted a 68 percent drop in quarterly earnings, halved its dividend and said it would seek to raise $10 billion in new capital.

Bank of America had been seen as a pillar of strength in a battered industry and made headlines with its plan to acquire investment bank Merrill Lynch & Co Inc. But analysts said the results showed the bank is also reeling from the credit crisis.

The weaker earnings reflected higher costs from two of the bank's most recent acquisitions, Countrywide Financial Corp, which had been the country's largest independent mortgage lender, and Chicago-based LaSalle Bank.

Deals to shore up the capital and liquidity of European banks seen at risk dominated a weekend of frenzied deal-making and emergency intervention by government officials.

Iceland gave regulators sweeping powers to oversee a faltering banking system as its currency fell 30 percent.

France's BNP Paribas agreed to scoop up assets in Belgium and Luxembourg of banking and insurance group Fortis for 14.5 billion euros ($20.1 billion) to become the euro zone's biggest deposit bank.

German officials brokered a revised rescue deal for lender Hypo Real Estate that will provide extra billions of euros of liquidity.

(Reporting by Reuters bureaus worldwide; Editing by Brian Moss, Steve Orlofsky, Gary Hill)