AIG to pay US$450m in bonuses despite bailout

AIG plans to pay 450 million dollars in bonuses to finance executives who led the US insurance giant to a 99.3-billion dollar loss last year, US media reported Sunday.

The payments have dismayed the US government as AIG has received 170 billion dollars in federal aid.

The bonuses are for staff at the London subsidiary AIG Financial Products, which helped trigger the collapse and then the nationalization of the former world number one insurer, The Wall Street Journal reported.

American International Group CEO Edward Liddy told Treasury Secretary Timothy Geithner bonuses could not be cancelled due to a risk of lawsuits for breaching employment contracts, The Washington Post said.

In a letter to Geithner, Liddy also indicated a refusal to pay bonuses worth tens of millions of dollars would prompt an exodus of senior employees.

"We cannot attract and retain the best and brightest talent to lead and staff the AIG businesses -- which are now being operated principally on behalf of the American taxpayers -- if employees believe that their compensation is subject to continued and arbitrary adjustment by the US treasury," Liddy wrote, according to the Post.

Some of the bonuses are as samll as 1,000 dollars but seven executives at AIG Financial Products were to receive more than three million dollars in bonuses, The New York Times reported.

For the fourth quarter, AIG announced a loss of 61.7 billion dollars -- the biggest ever for a US firm in one quarter -- pushing up its net loss for 2008 to 99.3 billion dollars.

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G20 bridges differences before key finance summit

Before a key summit on tackling the economic crisis, rich and emerging nations have agreed common ground on hiking IMF funds and stricter market regulation but remain split on stimulus measures.

G20 finance ministers on Saturday vowed to take "whatever action is necessary" on the world economic slowdown, after talks preparing for a London summit of world leaders on April 2.

They played down signs of division between the United States and Europe on how best to boost the global economy, insisting the road to the summit next month was smooth.

"We're prepared to take whatever action is necessary to ensure growth is restored and we're committed to do that for however long it takes," British finance minister Alistair Darling said Saturday after hosting the G20 talks.

"I believe that this does provide a very clear sense of direction."

The politicians managed to reach agreement on the need for an "urgent" and substantial funding boost for the International Monetary Fund (IMF), although a communique issued afterwards did not state a figure.

They also agreed to some tougher regulation of the financial system.

But the meeting failed to reach consensus on a new stimulus package, despite controversial calls from the US, the world's largest economy, for coordinated international pump-priming in recent days.

US President Barack Obama, who will attend the London summit in April, denied there were divisions on how to tackle the financial crisis, deriding such a notion as a "phony" story drummed up by the media.

"I don't know where this notion has emerged that somehow there are sides developing with respect to the G20," Obama told reporters after meeting Brazil's President Luiz Inacio Lula da Silva at the White House.

Agreement on IMF funding came after the United States recently suggested that its lending capacity should be trebled to 750 billion dollars (580 billion euros).

European leaders want to double the figure to 500 billion dollars.

The G20 on Saturday stated its key priority was restoring bank lending to help ease the effects of the crisis.

But Germany and France are opposed to US calls for new stimulus, instead favouring tougher regulation to tackle the crisis.

French Finance Minister Christine Lagarde said she was "delighted" that the G20 was closer on agreeing tighter regulation of markets.

The United States, eurozone, Japan and Britain are all in recession as the global economy struggles to recover from the worldwide credit crunch that erupted in late 2007.

Commercial banks are lending less cash amid fears about their exposure to the collapsed US sub-prime property market.

Also Saturday, British Prime Minister Gordon Brown, who will host the G20 summit, and German Chancellor Angela Merkel talked up the prospect of agreement on April 2.

"I'm very positive, I'm very optimistic that we will be able to... come to an agreement together with the United States, with emerging economies such as China and India," said Merkel after meeting Brown.

Brown, meanwhile, highlighted US support for changes in regulations for hedge funds and other "shadow banking" operations.

Highly speculative and lightly regulated hedge funds have been blamed for fuelling instability in financial markets.

Measures agreed at the G20 talks in Horsham, near London, included regulatory oversight of all credit agencies, blamed for being too slow to alert investors to high-risk instruments, as well as a need for "sufficient supervision and regulation of hedge funds".

US Treasury Secretary Timothy Geithner on Saturday said there was unprecedented unity among the G20 on the economy, insisting: "The world is with us" when asked about stimulus.

"We are seeing the world move together at a speed and on a scale without precedent in modern times," he said.

"We have a very broad basis consensus globally now on the need to act aggressively to restore growth."

The G20, whose members also include Canada, India, Italy, Russia and South Korea, also pledged Saturday to "fight all forms of protectionism and maintain open trade" and stressed commitment to helping developing economies.

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OPEC holds oil output until May

The OPEC oil exporters' cartel on Sunday agreed to keep current production levels unchanged until May, Iraqi oil minister Hussein al-Shahristani said.

"It's a rollover until May," al-Shahristani said after a key production meeting in the Austrian capital.

Qatar's energy minister Abdullah bin Hamad Al Attiyah added that the cartel would meet again on May 28 in Vienna to assess the market situation.

OPEC's official daily output quota currently stands at 24.84 million barrels after the cartel agreed to slash 4.2 million barrels late last year in an attempt to energise weak oil prices -- but questions remain about compliance.

The cartel has slashed its output three times since September as crude prices slumped in the face of a worldwide economic slowdown.

Algerian energy minister Chakib Khelil added Sunday that the May meeting would allow the Group of 20 (G20) richest nations time to respond to the global economic crisis at a London summit of world leaders on April 2.

"I think it was a responsible position (to hold output) and also to give the chance to the G20 to do its job on April 2. In light of the decision they will make, we'll make our decision on May 28."

He added: "All of us will have to make an extra effort to be at 100 percent" in terms of compliance with last year's output cuts. "And then (in May) we will have a chance to review compliance."

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Malaysia cuts foreign worker permits by 70%

Malaysia has slashed its work permit approvals for foreign workers by almost 70 per cent so far this year, faced with the twin threat of layoffs and recession, according to a report Sunday.

In January and February, an average of 250 permits were approved daily compared to 800 last year, following a more stringent vetting process by the authorities, a Home Ministry official told the Star newspaper.

"Those requesting for foreign labour have to prove that they have made the effort to employ locals," the ministry's senior deputy secretary-general Raja Azahar Raja Abdul Manap was quoted as saying.

"If they can prove it, then they will get the clearance," he said.

A ministry spokesman was not immediately available to confirm the report.

In January, Malaysia banned the hiring of new foreigners in the manufacturing and services sectors after a report forecast 45,000 Malaysians would lose their jobs in the next few months.

And last week, the government cancelled work visas issued to 55,000 Bangladeshi workers after unions said the situation for Malaysians was bleak enough without additional foreign manpower being brought in.

Malaysia is one of Asia's largest importers of labour and has an estimated 2.2 million foreign workers, who are the mainstay of the plantation and manufacturing sectors.

However, the government has become concerned about the ramifications of having such a large migrant workforce and periodically tries to reduce it.

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Taiwan to allow up to two casino resorts

Taiwan has taken another step forward in a move to lift a decades-old ban on casinos after it was decided no more than two gambling resorts would be licensed at the beginning, it was reported Sunday.

The ruling Kuomintang (KMT), who control the legislature, pushed through a controversial bill in Parliament in January to lift the ban on casinos despite fears it could lead to more crime and damage morality.

The bill allows offshore islands to build casinos only if they are approved by residents in referendums.

Developers who win a licence would be required to build a hotel with a minimum of 1,000 rooms according to the result arrived at Saturday during a meeting of government agencies, the Chinese-language China Times reported.

The agencies also decided that the government would not issue the third licence within 10 years of licensing the second one to "avoid competition and reduce possible social impacts," the report said.

Officials say it may take a year for government agencies to amend the existing law and complete investment requirements and screening procedures.

Hundreds of activists from religious and environmental protection groups took to the Taipei streets Sunday to demonstrate against casinos.

"President Ma Ying-jeou, who has distinguished himself as a politician of high moral standards, should have a second thought on the matter," Ho Tsung-hsun, one of the protest leaders, told AFP.

"The experience of other countries introducing casinos indicated that they would boost the domestic crime rates," he said.

British developer AMZ Holdings Plc and Taiwan's Penghu Bay Development Co., have been preparing land for casino projects in Penghu, the archipelago located in the middle of the Taiwan Strait, the Penghu county government said earlier.

Penghu hopes to attract half a million tourist visits each year, generating 100 billion Taiwan dollars' worth of revenue annually in gambling and tourism, and creating up to 50,000 jobs.

Local media has speculated that the world's casino giants would pour money into Penghu having suffered a hammering elsewhere in the global financial crisis.

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Hong Kong's air cargo traffic drops

Hong Kong's air cargo traffic dropped nearly 20 per cent year-on-year in February as overseas demand for Chinese goods continued to shrink, the airport authority said Sunday.

Hong Kong International Airport (HKIA) said it handled 198,000 tonnes of cargo in February, 19.7 per cent less than the same month last year, as the global economic downturn took its toll.

February's fall was despite this year's Chinese New Year celebrations falling earlier than in 2008, which meant that manufacturing activities in China had resumed.

HKIA also reported a 13.7 per cent fall in passenger volume to 3.4 million.

The city's air cargo volume has seen double-digit year-on-year declines in recent months as the US, Europe and other major buyers of Chinese manufactured goods cut their orders after being badly hit by the financial crisis.

"It is unlikely that this downward trend (in cargo traffic volume) will reverse in the short term when the world's major economies remain in recession," said Stanley Hui, chief executive officer of HKIA, in a statement.

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Kuwait to scrap new refinery project

Kuwait will scrap a 15-billion dollar project to build a new oil refinery after an independent watchdog said the project was not feasible, the prime minister said in comments published Sunday.

"The government is committed to the Audit Bureau report, and the council of ministers will officially halt the project at its next meeting," which takes place on Monday, Sheikh Nasser Mohammad al-Ahmad al-Sabah told Al-Watan daily.

Kuwait in May awarded contracts to build the 630,000-barrels per day refinery to four South Korean companies and a Japanese firm and later signed letters of intent with them.

The deals prompted a dispute between the government and opposition MPs who alleged the bidding process and awarding of contracts involved flawed procedures.

MPs said the contracts should have been awarded through the state-run Central Tenders Committee (CTC) to ensure transparency, and vowed they would quiz the oil minister if the contracts were signed.

The Gulf state's government in August bowed to political pressure and referred the project to the Audit Bureau for an investigation.

Though the outcome of the report was not published, local media and MPs said the Bureau concluded that the project was technically and economically not feasible and should go through the CTC.

In December, Kuwait scrapped a 7.5-billion dollar partnership with US Dow Chemical after pressure from MPs, citing high cost amid the global economic downturn.

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Macau still worth a gamble

Half-finished casinos and dropping revenues have fuelled fears that Macau's staggering growth has faltered, but analysts insist the gaming haven remains a sure long-term bet.

The former Portuguese colony has transformed itself from a sleepy backwater to a dazzling entertainment centre in the last five years, with foreign and Chinese-owned casinos sprouting up across the territory.

The city of just 550,000 now takes in more gaming revenue than Las Vegas and Atlantic City combined, thanks to the voracious gambling of Chinese visitors who have poured in from the mainland.

But worries over corruption, problem-gambling and foreign companies grabbing the spoils from China's recent economic boom led Chinese authorities to stem the flow of visitors last summer.

The tougher visa restrictions caused a sharp drop in revenue growth sparking a slew of negative stories, plummeting casino stocks and a hiatus in the city's construction boom.

But some analysts are adamant fears about Macau's demise are premature.

"Macau has been used to more than 40-percent growth -- that cannot be sustainable and a slowdown is natural," said Zeng Zhonglu, a professor in gaming economies at Macau Polytechnic Institute.

"My impression is that the economy generally is healthy."

Jonathan Galaviz, an analyst with Las Vegas-based consultancy Globalysis, said any disruption to economic growth will be temporary with Macau's short-term performance expected to fluctuate along with the Asian economy.

While gaming revenues dipped sharply over the second half of 2008, the city still raked in a total of 13.5 billion US dollars for the year, a 31 percent increase year-on-year. Revenues rose 46 percent in 2007.

Meanwhile, employment held steady in the three months to January and retail sales rose 34 percent in 2008. Gaming is a central part of the economy.

During a recent visit, there were lengthy queues at the immigration counter and the city centre jewellery and watch stores were humming with shoppers.

The tables at the Grand Lisboa, the flagship casino of local tycoon Stanley Ho, were three deep with heavy-smoking Chinese gamblers playing their favourite game of Baccarat.

But it is in the hidden world of the VIP gaming rooms where the city has suffered.

VIP revenues have played a central role in the success of Macau's economy with top casinos tussling with each other to attract high-rollers.

But many of the heaviest gamblers were Chinese government officials and the heads of state-owned companies, whose frittering away of public cash in Macau's private rooms has become a national scandal.

Unsurprisingly, official figures are not collated, but Zeng has combed through mainland media reports to establish a clearer picture.

Of the 99 cases he uncovered, he said each official or businessman lost an average of 20 million yuan (2.9 million US dollars) on the tables.

One official lost 100 million yuan in one day in 2007, while another had to be carried out of a Macau casino as he was too weak to walk after six days and nights of constant gambling.

"The central government is highly concerned that so much money is disappearing in Macau," Zeng said.

"It leads to bribes and the theft of public funds, all of which greatly damages the government's reputation."

Glenn McCartney, a tourism academic at Macau University and local businessman, said the city had to change its business focus from VIPs to a genuine mass-market entertainment, attracting visitors from across Asia.

"I am very confident about Macau. The market is not anywhere near maturity level yet," he said.

"But Macau is not Las Vegas. If I was sitting in the marketing department of a casino firm, I would be asking what changes we have to make so we can attract more people from the mainland."

US firm Las Vegas Sands in particular is hoping China will allow more visitors in.

The most aggressive foreign investor in the city, it opened the world's biggest casino, The Venetian, in 2008.

But worsening credit markets have stalled its ventures across the world, and last November it was forced to sack 11,000 workers and halt work on a huge complex of new hotels opposite the gargantuan Venetian.

Four months later, the quiet building site remains the most potent symbol both of Macau's risks for investors and its potential.

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British PM promises tougher financial watchdog

Prime Minister Gordon Brown promised on Sunday to strengthen Britain's financial watchdog, giving it more power and resources to supervise the country's financial sector.

Brown's remarks come just a day after finance ministers from the G20 group of industrialised and developing countries vowed to take "whatever action is necessary" on the world economic slowdown, after talks preparing for a key summit on fighting the crisis next month.

"The world has changed beyond recognition not just in the past 10 years, but in the past 10 months too," the premier, himself a former finance minister for a decade, wrote in the Sunday Telegraph newspaper.

"Our system for financial regulation must change with it. This means a new tougher approach, addressing the new challenges, with a reformed, tougher and better-resourced Financial Services Authority (FSA) at its core."

Brown said other measures that needed to be taken included bringing hedge funds and other investment funds under the FSA's supervision, holding board-room directors to account, greater international co-operation and a new pay and bonus structure.

He said there also needed to be better monitoring of the effect of an institution and its assets on the financial system, and stronger cross-border supervision.

"While the 1997 supervisory system was right for the circumstances we faced then, it is now clear that the detailed regulation of financial markets across the world did not keep up with the pace of change in the global economy," he wrote.

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Switzerland risks OECD tax blacklisting

Switzerland said the OECD economic grouping threatened to blacklist it as a tax haven and it risked being punished with economic sanctions, according to comments published on Saturday.

The comments by Swiss Finance Minister Hans-Rudolf Merz came a day after Switzerland and other states said they would relax their bank secrecy laws, within strict limits, amid global pressure to stamp out tax havens.

"The secretariat general of the Organisation for Economic Cooperation and Development (OECD), without informing us, drew up a proposal for a new blacklist on March 5. I have learned that Switzerland was on it," Merz was quoted as saying by the daily Le Temps.

He said the list was drawn up at the request of the Group of 20 (G20) rich and emerging countries, whose finance ministers were meeting in England on Saturday ahead of a full summit of its leaders on April 2.

The G20 has made the fight against tax havens one of its top priorities, with Germany and France pushing particularly hard.

"For the moment it's just a threat," Merz said of the blacklist proposal. "But if this threat becomes a reality during the G20 on April 2, it could entail economic sanctions for the countries targeted."

Switzerland joined Luxembourg, Austria and Monaco on Friday in saying it would relax bank secrecy laws. Merz said the decision came in response to pressure from the G20.

"We cannot run such a risk" of being blacklisted and suffering sanctions, he said.

Friday's announcements followed similar moves Thursday by Belgium, Liechtenstein and Andorra. The latter two are already on an OECD list of uncooperative tax havens.

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G20 agrees to 'regulatory oversight' of credit rating agencies

The G20 agreed here on Saturday to "regulatory oversight" of all credit ratings agencies, which are under fire for being too slow to alert investors to the dangers of high-risk investments.

The G20 group of rich and emerging economies has agreed to "regulatory oversight, including registration, of all credit rating agencies whose ratings are used for regulatory purposes," said a final communique following talks.

Saturday's meeting of finance ministers and central bankers also recommended that a G20 summit on April 2 agrees to "an appropriate degree of regulation and oversight" of "important financial institutions, markets and instruments."

It also wants to see that "hedge funds or their managers are registered and disclose appropriate information to assess the risks they pose."

Highly speculative and lightly regulated hedge funds have been blamed for fuelling instability in financial markets.

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Obama soothes China on US debt

President Barack Obama has said that China could have "absolute confidence" in the American economy, after Beijing pointedly questioned the safety of its huge haul of US government debt.

Obama took up comments by China's Premier Wen Jiabao on Friday, which represented a rare assessment by Beijing on the health of the US economy and the prospects for China's hundreds of billions of dollars in Treasury bonds.

"Not just the Chinese government, but every investor can have absolute confidence in the soundness of investments in the United States," Obama said after meeting Brazilian President Luiz Inacio Lula da Silva at the White House.

"There is a reason why even in the midst of this economic crisis you have seen actual increases in investment flows here in the US."

"I think it is a recognition that the stability not only of our economic system but also our political system is extraordinary."

Obama said that his comments were applicable to both US Treasury instruments and investments in the US private and industrial sectors.

Wen told reporters in Beijing on Friday that he was concerned about China's huge stake in the US economy as it endures the worst crisis in generations.

"We have lent huge amounts of money to the United States. Of course we are concerned about the safety of our assets," Wen said.

"To be honest, I am a little bit worried and I would like to ... call on the United States to honour its word and remain a credible nation and ensure the safety of Chinese assets."

Wen's comments caused a stir in global markets, and were the latest disturbance to the critical US-Chinese relationship early in Obama's administration.

Last week, military tensions rose after the United States said Chinese boats harassed the US Navy surveillance vessel Impeccable in the South China Sea, forcing the ship to take emergency action to avoid a collision.

Beijing said the vessel was on a spying mission.

China also balked at US comments on the human rights situation in Tibet -- but both sides tried to smooth over the row with Foreign Minister Yang Jiechi's visit to the White House on Thursday.

Beijing held 727.4 billion dollars in US Treasury bonds at the end of last year, just ahead of Japan, the holder of 626 billion dollars in bonds, according to US government data.

As the largest creditor to the United States, China is "extremely interested in developments in the US economy," Wen said.

Analysts say a loss of confidence in US Treasury securities could cause a dramatic drop in the dollar and force Washington to pay higher interest rates.

In February, Secretary of State Hillary Clinton asked China to keep on buying US debt, saying it could help jumpstart the flagging US economy and stimulate imports of Chinese goods.

"By continuing to support American Treasury instruments the Chinese are recognizing our interconnection. We are truly going to rise or fall together," Clinton said.

Most of China's foreign exchange reserves, which reached 1.95 trillion dollars by the end of 2008, is believed to be held in the greenback.

White House spokesman Robert Gibbs said Friday that "there's no safer investment in the world than in the United States."

Obama rolled out an audacious 3.55-trillion-dollar budget proposal last month that bristles with economic reforms and spending on healthcare, climate change and education.

The budget forecasts a 1.750 trillion dollar deficit in fiscal 2009, but foresees that figure falling to 1.171 trillion dollars in 2010.

The Chinese reportedly are concerned about the enormous amount of borrowed money, including Obama's nearly 800-billion-dollar stimulus, being used to boost US growth.

Concerns are flaring in China that the stimulus plan could hurt dollar-denominated assets, with some observers urging China to cut US Treasury holdings, the official Xinhua news agency said last month.

Domestic critics have charged that, as a developing country, China should be investing at home instead of subsidizing the world's richest country, or else diversifying into other foreign assets.

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Iran, China firms sign US$3b LNG deal

Iran's state-owned gas company and a Chinese consortium Saturday signed a multi-billion dollar deal to produce liquefied natural gas in the Islamic republic's South Pars field, a report said.

The deal, worth 3.39 billion dollars, was signed by Iran LNG company with the Chinese consortium for an annual production of 10.5 million tonnes of LNG, the state broadcaster reported.

It did not reveal the name or give any details of the Chinese consortium.

"According to this contract, building gas liquefying lines in phase 12 and another block of South Pars gas field will be handed to the Chinese consortium," the television said. The gas field is located in the Gulf.

It added that the project would be implemented in three years and that an unnamed European firm would join the Chinese consortium in three months.

In January, Iran and China signed a separate 1.76 billion dollar contract for the initial development of the North Azadegan oil field in western Iran.

Western oil companies have refused to invest in Iran because of the controversy over its nuclear energy programme and Tehran has increasingly turned to Asian companies.

Iran holds the world's second-largest gas reserves and has significant economic ties with China -- a veto-wielding member of the UN Security Council, which has imposed sanctions against Tehran over its refusal to halt sensitive nuclear work.

Iran said on Wednesday that French energy giant Total would have no "active role" in developing phase 11 of the offshore South Pars gas field and that a new partner had been found for the project.

The development of South Pars field, which holds about eight percent of world reserves, has been delayed amid a lack of investment in a country faced with severe gas needs of its own in winter.

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G20 to take 'whatever action necessary' on slowdown

G20 finance ministers vowed Saturday to take "whatever action is necessary" to curb the global slowdown, after talks preparing for a crunch summit next month.

Downplaying signs of division between Europe and the United States, they agreed that there was an "urgent need to increase IMF resources very substantially" although no figure was given.

"We're prepared to take whatever action is necessary to ensure growth is restored and we're committed to do that for however long it takes to do that," said British finance minister Alistair Darling, who hosted the talks.

The G20 would ensure there was "sufficient supervision and regulation" of hedge funds, he added. "In addition to that, we agreed that stronger regulation... was necessary to prevent the build-up of systemic risk.

"We also agreed that we need to do more both to strengthen banks in the good times so they can face the downturn should that occur", including measures that would see regulators stop banks from overextending themselves, he said.

Politicians from the United States, China and Japan plus wealthy European nations and emerging powers had held a day of talks to pave the way for the April 2 London G20 summit on tackling the downturn.

The run-up to Saturday's meeting was marked by splits between the United States and Europe, particularly on whether to launch a new economic stimulus plan or concentrate on tightening market regulation to fight recession.

But Darling said the finance ministers had agreed on a common line.

"Taken together, I believe that this does provide a very clear sense of direction as we move towards the conference of leaders and finance ministers to be held in London on April 2," he said.

"We agreed a significant amount of progress, there was a great deal of consensus both about the urgency of the problems we face and the steps that we ought to be taking."

He said the meeting had also agreed to fight protectionism and protect free trade.

In a separate meeting Saturday Britain Prime Minister Gordon Brown, who will host the G20 summit, and German Chancellor Angela Merkel talked up the prospect of agreement at the much-vaunted London summit in about three weeks.

"I'm very positive, I'm very optimistic that we will be able to... come to an agreement together with the United States, with emerging economies such as China and India," said Merkel.

Brown added that key power-broker the US was ready to support changes in regulations for hedge funds and other "shadow banking" operations.

Highly speculative and lightly regulated hedge funds have been blamed for fuelling instability in financial markets.

The run-up to Saturday's meeting saw splits open up between the United States and Europe after Larry Summers, US President Barack Obama's top economic adviser, this week urged world leaders to take coordinated steps to pump money into the global economy.

That has been rejected by countries including France and Germany, which instead favour tougher regulation to tackle the crisis.

A US stimulus package of 787 billion dollars (615 billion euros), signed into law last month, compares to 400 billion euros committed by 27 EU countries.

The two total economies are of comparable size, but the EU has not forged an integrated response.

The United States, eurozone, Japan and Britain are all in recession as the global economy struggles to recover from the worldwide credit crunch that erupted in late 2007.

Commercial banks are lending less cash amid fears about their exposure to the collapsed US subprime property market.

The agreement on the IMF came after the United States suggested this week that its lending capacity should be trebled to 750 billion dollars (580 billion euros).

G20 emerging powers Brazil, Russia, India and China (BRIC) meanwhile said in a communique Saturday that IMF resources were "clearly inadequate and should be very significantly increased".

It called for new, more flexible facilities to help countries facing financial problems, strengthened IMF surveillance and "urgent action" to ensure that emerging economies play a bigger role within the Fund.

The BRIC nations also warned against protectionism, describing it as "an increasingly real threat to the global economy".

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US dollar higher in Asia

The US dollar rose against other major currencies in Asia on Thursday, approaching four-month highs against the yen, after Washington unveiled a new plan to shore up the troubled US housing sector.

European currencies were weighed down by expectations that the European Central Bank and the Bank of England will reduce their key lending rates when they meet later in the day.

The dollar gained to 99.21 yen in Tokyo morning trade, up from 98.98 in New York late Wednesday, when the greenback hit 99.49 at one point, the highest level since early November.

The euro fell to 1.2619 dollars from 1.2657 and to 125.22 yen from 125.29.

"The dollar continues to be supported by the view that the United States is taking stimulus measures faster than other economies," Hachijuni Bank chief forex strategist Masatsugu Miyata said.

Investors were encouraged by Washington's launch of a 75-billion-dollar scheme to stem rising home foreclosures.

Traders were monitoring the start of China's annual session of parliament, where Premier Wen Jiabao said China would weather the global economic crisis with eight per cent economic growth this year.

Wen struck an upbeat tone but he did not unveil any new stimulus package in addition to the one outlined in November.

Players were also focused on central bank meetings in Europe. The ECB was expected to cut its key lending rate by 50 basis points to 1.5 per cent, the lowest level in the bank's 10-year history, while the Bank of England was expected to trim interest rates by half a percentage point to 0.5 per cent.

Investors will be closely watching whether the central banks will announce a set of unorthodox tools to fight the credit crunch and boost the money supply, dealers said. The pound dropped to 1.4157 dollars from 1.4195.

Markets are also fearful of a particularly bad US labour report on Friday, after a private sector survey showed 697,000 job losses in February.

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Oil prices higher in Asian trade

Oil prices rose in Asian trade Thursday, building on overnight gains on signs that demand in the United States and China could strengthen, analysts said.

New York's main futures contract, light sweet crude for delivery in April, gained 12 cents to 45.50 dollars a barrel.

Brent North Sea crude for April rose 19 cents to 46.31 dollars.

An increase in gasoline demand in the United States as shown in the Department of Energy's weekly report helped pull prices up, analysts said.

"The latest US weekly data show the strongest February week for gasoline demand ever and a further significant improvement in gasoline fundamentals," Barclays Capital analysts said.

While US crude stockpiles dropped by 700,000 barrels during the week ending February 27, they remained 16 per cent above their level a year ago.

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US dollar weakens as market fears ease

The US dollar swung lower against the euro but rose against the yen as financial markets brightened on signs of a big Chinese economic stimulus that capped the greenback's recent fear-driven gains.

The euro rose to 1.2657 dollars at 2200 GMT against 1.2556 dollars on Tuesday after falling at one point to 1.2457 dollars, a three-month low.

The dollar meanwhile edged up to 98.98 yen from 98.15 on Tuesday.

The recent gains for the dollar as well as the yen have been largely driven by worries about a deeper economic slide that has prompted a move into safe-haven assets.

Sacha Tihanyi at Scotia Capital said news of a likely Chinese economic stimulus that could help the global economy "has helped set a more positive tone" in the market.

Analysts largely looked past a report that the US private sector shed a greater-than-expected 697,000 jobs in February as employers slashed payrolls to cope with the shrinking economy. Also having little impact was a grim Federal Reserve Beige Book survey on the US economy through February.

"The US dollar is continuing to give up ground against most major and emerging currencies as tensions continue to ease on encouraging economic news from China and a possible enlargement of the Chinese stimulus package," said analysts at Brown Brothers Harriman.

"The weak US ADP jobs report and a dismal Beige Book pointing to broad-based economic deterioration with temp staffing dismal, a sign Friday's US jobs data could be even worse than the 650,000 loss expected, have not boosted tensions."

The euro began the day on the back foot as investors, rattled by gloomy global economic prospects and crumbling stock prices, bought the dollar, seen as a refuge currency in times of trouble.

In addition, the single currency suffered from widespread forecasts of another eurozone rate cut on Thursday by the European Central Bank.

The ECB is expected to lower its benchmark interest rate by half a point to an all-time low of 1.50 percent as it struggles to remedy a crippling recession in the 16-member eurozone.

Investors are also looking for a rate cut by the Bank of England.

The yen's fall against the dollar came as Japan's opposition leader Ichiro Ozawa, seen as a potential future prime minister, dismissed calls to resign after a close aide was arrested in a fundraising scandal.

In late New York trade, the dollar stood at 1.1683 Swiss francs after 1.1758 on Tuesday.

The pound was at 1.4195 dollars after 1.4050.

"Sterling is one of the better performers today," according to Scotia Capital's Tihanyi, who nonetheless cautioned that the currency could be volatile if the Bank of England takes extraordinary moves such as quantitative easing to boost its economy.

"With the BoE likely to drop the quantitative easing bomb tomorrow, we would be nervous if sterling got too far ahead," the analyst said.

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Oil prices leap on US, Chinese demand hopes

Oil prices rose sharply on Wednesday on signs that demand could strengthen in the United States and China, the world's leading energy consumers.

New York's main futures contract, light sweet crude for April, finished at 45.38 dollars a barrel, a gain of 3.73 dollars from Tuesday's close.

In London, Brent North Sea crude for delivery in April rallied 2.42 dollars to settle at 46.12 dollars a barrel.

The New York contract, which opened higher, built upward momentum after the US government's weekly report on crude reserves in the world's largest oil consumer.

The US Department of Energy said US stockpiles of crude oil dropped 700,000 barrels during the week ending February 27, instead of the rise of one million barrels forecasted by most analysts.

The increase mainly was led by a pickup in refining activity.

But US crude inventories remained high, 16 percent above their level a year ago.

The DoE data revealed gasoline demand once again climbed over the past four weeks compared with a year ago, further underpinning prices.

"The latest US weekly data show the strongest February week for gasoline demand ever and a further significant improvement in gasoline fundamentals relative to the weakness in the middle of the barrel," Barclays Capital analysts said.

Less encouraging for prices was a rise in stockpiles of gasoline, diesel and heating fuel.

"A mixed report - not really supportive for crude as inventories remained at pretty high levels, clearly bearish for heating oil and diesel, but bullish again for gasoline on demand revival," Michael Wittner at Societe Generale summed up.

Crude prices also found support on hopes of greater demand from China, stoked in part by reports that China will soon announce new additional stimulus actions to boost its sluggish economy.

"Crude prices were higher on increased optimism the Chinese economy would recover swiftly from the current downturn following some positive economic news," Sucden analyst Nimit Khamar said.

The Chinese government said manufacturing activity contracted for a fifth straight month in February but the decline slowed, with the data falling just short of the boom-bust line.

The Purchasing Managers Index (PMI) for China's manufacturing sector rose to 49 in February from 45.3 in January, the China Federation of Logistics and Purchasing said.

"The Chinese PMI (showed) a marked improvement from the record low of 38.8 in November 2008," Khamar noted. "However, a reading of below 50 still indicates contraction."

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PM Wen says China faces "unprecedented" challenges over crisis

Premier Wen Jiabao confidently declared Thursday that China would be able to ride out the unprecedented challenges of a worsening global crisis and achieve eight per cent economic growth this year.

In his annual "state of the nation" address to open parliament, Wen gave the most detailed blueprint yet of a four trillion yuan (585 billion dollar) stimulus plan aimed at steering China through the downturn.

However he did not unveil any new stimulus package in addition to the one outlined in November. Stock markets around the world soared Wednesday on expectations of another massive round of spending to boost China's economy.

"We are fully confident that we will overcome difficulties and challenges, and we have the conditions and ability to do so," Wen told the 3,000 delegates gathered for the Communist Party's showpiece political event of the year.

The premier made it clear China's economy, the third biggest in the world, was hurting from the crisis and that the environment was not expected to get better soon.

"We face unprecedented difficulties and challenges. The global financial crisis continues to spread and get worse," he said.

"Demand continues to shrink on international markets. The trend for global deflation is obvious and trade protectionism is resurgent."

Wen acknowledged fundamental problems in China exacerbated by the crisis, such as an inadequate social safety net and incomplete health care, as well as a wealth gap.

Nevertheless, he sought to reassure China's 1.3 billion people that major reforms were being planned and that there was no need for panic.

"Our confidence and strength comes from many sources," he said.

China's economic growth had slumped to 6.8 per cent in the final quarter of last year, worrying figures for a government long used to double-digit expansions and marking a dramatic slowdown from 13.0 per cent growth in 2007.

But he said China's gross domestic product (GDP) will grow by 8.0 per cent in 2009.

"It needs to be stressed that in projecting the economic growth target of about 8.0 per cent, we have taken into consideration both our need and ability to sustain growth," Wen said.

And amid deflation concerns, he said the government had set an inflation target of 4.0 per cent for the year.

Wen outlined a wide-ranging plan for the four trillion yuan package, which is to be spent over two years and which will contribute to a record budget deficit of 950 billion yuan (140 billion dollars) in 2009.

This included plans to boost domestic spending, improve the social safety net, raise incomes for the nation's roughly 800 million people living in the countryside and give support for key industries such as steel and auto.

China's leaders had previously indicated that improving the plight of the nation's least well off would be a top focus for the annual parliamentary session, which will last nine days.

This has become a greater concern due to the economic slowdown, as rising unemployment fuelled fears of further social unrest in a country that sees tens of thousands of protests each year.

Adding to the sense of unease are tensions surrounding China's 58-year rule of Tibet, as an ultra-sensitive 50th anniversary of a failed uprising against Chinese rule falls during the parliament sessions, on March 10.

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US economy fell further in February, says Beige Book report

US economic activity "deteriorated further" through February, dampening prospects for a quick recovery from recession, the Federal Reserve said in its Beige Book report on Wednesday.

The report, to be used at the upcoming meeting of Fed policymakers March 17-18, said the troubles were broad-based, citing weak consumer spending, tight credit and further declines in the factory sector.

"Looking ahead, contacts from various districts rate the prospects for near-term improvement in economic conditions as poor, with a significant pickup not expected before late 2009 or early 2010," the report said.

The Beige Book said consumer spending, a key driver of the economy, "remained sluggish on net, although many districts noted some improvement in January and February compared with a dismal holiday spending season."

It cited declines in travel and tourist activity and "a wide range" of services, amid "substantial job cuts."

In manufacturing, most Fed districts reported "steep declines in activity in some sectors and pronounced declines overall."

The real estate market, which set off the economic slide, was "largely stagnant, with only minimal and scattered signs of stabilisation emerging in some areas, while demand for commercial real estate weakened significantly."

In the financial sector, which has been struggling with massive losses, many banks saw "further drops in business loan demand, a slight deterioration in credit quality for businesses and households, and continued tight credit availability," the Beige Book said.

The US economy contracted at a whopping 6.2 percent pace in the fourth quarter of 2008, based on the most recent government estimate. Some analysts say the downturn may be even worse in the first quarter of 2009, with the crisis easing late this year or early 2010.

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Obama aims to save billions in federal contracts

US President Barack Obama on Wednesday outlined a plan to save tens of billion dollars a year in wasteful government spending, especially targeting bloated defence contracting.

"We are spending money on things we don't need, and we are paying more than we need to pay. That's completely unacceptable," Obama said at the White House.

The US leader signed a presidential memorandum reforming the contracting system across the entire government, in line with a vow to cut unnecessary waste.

The president was flanked by Democratic Senator Carl Levin, head of the Senate Armed Services Committee, and his onetime Republican rival for the presidency, Senator John McCain, along with other US legislators and officials.

Obama said it was time to end "an era of fiscal irresponsibility so that we can sustain our recovery, enhance accountability, and avoid leaving our children a mountain of debt."

He homed in on runaway Pentagon spending, vowing that "the days of giving defence contractors a blank check are over," and highlighted steps being taken by Defence Secretary Robert Gates to overhaul military procurement at the Pentagon.

"It's time to end the extra costs and long delays that are all too common in our defence contracting," the president said, vowing to "strengthen oversight to maximise transparency and accountability."

The cost overruns were especially apparent during the war in Iraq, where "too much money has been paid out for services that were never performed, buildings that were never completed, companies that skimmed off the top."

The reforms require the White House budget director to work with cabinet members and agency heads to frame tough new guidelines on contracting work by the end of September.

Obama aims to save 40 billion dollars each year by halting outsourcing in some government jobs, and by ending "no-bid" contracts for favoured companies which proliferated in US operations in Iraq.

Last month, the US leader ordered a review into huge cost overruns on a new fleet of presidential helicopters, as McCain complained at the skyrocketing cost, raising concerns about how many military projects tend to come in well over budget.

"I don't think that there's any more graphic demonstration of how good ideas have cost taxpayers an enormous amount of money," McCain said at the time. Read more ...

Japan's business investment drops at record pace

Japanese companies are slashing their investment in plants and equipment at a record pace to cope with a worsening recession in Asia's biggest economy, data showed Thursday.

Investment dropped by 17.3 percent in the three months to December from a year earlier, led by automakers and other manufacturers, the finance ministry said. It was the biggest fall since comparable records began in 2002.

Excluding spending on software, investment declined by 18.1 percent.

"The result confirmed that the Japanese economy is worsening rapidly and going though a very tough phase," a finance ministry official told reporters.

Companies suffered an 11.6 percent drop in sales in the quarter from a year earlier and a 64 percent slump in pretax profits.

Manufacturers were hardest hit, with earnings diving 94 percent.

Before the current downturn, Japan's corporate sector had been a key driver of a recovery in Asia's largest economy following the recessions of the 1990s.

But firms are now cutting back their investment in response to slumping demand and profits, raising fears that the current recession will be deeper and longer than previously feared.

Companies from Sony to Toyota Motor have been slashing jobs to cope with the slump.

Japan's economy shrank 3.3 percent in the fourth quarter of 2008 -- 12.7 percent on an annualised basis -- logging its worst performance since 1974, an initial estimate showed last month.

The business investment figures will be used to calculate revised gross domestic product figures due on March 12.

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Taiwan cuts taxes to boost sagging economy

Taiwan moved to reduce corporate and personal income tax Thursday, as part of the government's efforts to help lift the sagging economy, officials said.

The government plans to lower the corporate income tax rate from 25 to 20 percent, effective 2010, the cabinet said after it approved the cuts during a meeting.

"The tax cuts will strengthen Taiwan's competitiveness, attract investments, and immensely help small- to medium-sized companies," deputy finance minister Chang Sheng-ford told reporters.

The tax cuts, pending parliament's final approval, will lead to an estimated loss of 80.8 billion Taiwan dollars (2.3 billion US dollars) in annual tax revenue, the cabinet said.

However, the move comes as the majority of tax benefits extended to companies, especially those in the electronics sector, are scheduled to expire at the end of 2009, boosting annual tax revenue by 148.3 billion Taiwan dollars.

Taiwan plunged into recession as the economy contracted a record 8.36 percent in the three months to December due to the global economic meltdown, and the economy was forecast to contract 2.97 percent in 2009, the government said.

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Philippines' inflation rises to 7.3% in Feb

Philippine inflation rose to 7.3 per cent in February, up from a year earlier due to price increases in the food, beverage and fuel, light and water sectors, the government said Thursday.

The rise marked an acceleration from the 5.4 per cent rate posted in February 2008 and from the 7.1 per cent rate posted in January this year, the National Statistics Office said.

Excluding the volatile food and energy spaces, the core inflation rate moved at only 6.4 per cent in February, down from 6.9 per cent in January, the office added.

In a statement, central bank deputy governor Diwa Guinigundo said that the inflation rate was within the bank's expectations. The bank had earlier forecast February inflation at 6.6 to 7.5 per cent.

"It is also important to note that core inflation actually slowed down in February versus January," he added.

But he did not say how this would affect the central bank's meeting later in the day to set policy rates.

February marked the first uptick in inflation since September when inflation began to slide down from 17-year highs.

"After slowing in recent months, data in February indicate inflation may move sideways in the coming months. This supports the view that monetary policy will be kept unchanged," Jonathan Ravelas, a market strategist of Banco De Oro told Dow Jones newswires.

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Oil prices fall in tandem with stocks

Oil futures fell on Monday in tandem with global stock markets amid gathering economic gloom, despite hints that OPEC could cut output next month in a bid to boost prices.

New York's main futures contract, light sweet crude for delivery in April, eased 1.59 dollars from the closing price on Friday to 38.44 dollars per barrel after spending much of the day in positive territory.

In London, Brent North Sea crude for April delivery lost 90 cents to settle at 40.99 dollars.

The market rose in early trading after the US Treasury announced that a new programme aimed at shoring up troubled banks would be launched on Wednesday but the rally fizzled out amid concerns the plan may lead to effective government control.

The plan would begin with a "stress test" to be conducted by the authorities on a number of banks amid persistent speculations that leading banks could be nationalised to contain losses incurred from a home mortgage crisis.

Analysts said oil prices fell in line with the equity market, where investors sharply pulled down share prices amid confusion over the future of financial institutions.

"This week's examination of the nation's largest banks will undoubtedly lead to unsettling and misinterpreted headlines and more volatility, not only for oil markets but all financial markets," said Mike Fitzpatrick of MF Global.

He also noted possible moves by the OPEC cartel to cut production further to boost prices, saying market movements would be subject to policy directions.

"They will very likely decide on more production restraints at their next meeting in March," Fitzpatrick said. "OPEC's current resolve may have prevented oil prices from falling even further though.

"The waxing and waning confidence that policy makers manage to elicit from market participants will carry greater weight in the short term than market fundamental," he said.

Algeria's minister for energy and mines said Sunday that OPEC would probably decide on more cutbacks in output in a bid to prevent further price drops, Algeria's APS news agency reported.

"It is very likely that OPEC will decide on March 15 to reduce production again to stabilise prices that are going down," said Chakib Khelil, referring to the oil cartel's next meeting in Vienna, according to APS.

The minister said OPEC's decision to reduce production by 4.4 million barrels per day in September had prevented oil prices from plummeting even further.

In a slowing global economy, crude oil prices have dropped from record highs above 147 dollars reached last July.

The Organisation of Petroleum Exporting Countries pumps 40 percent of the world's oil and late last year cut output by a total 4.2 million barrels per days as prices slumped.

The cartel will find it "extremely difficult" to boost oil prices by cutting output because of the uncertain economic climate, energy consultancy CGES warned on Monday.

"OPEC would like to cut production further to boost prices, but several members have yet to implement the agreed cuts," the Centre for Global Energy Studies (CGES) said in its latest monthly report.

"The weak state of the global economy will make it extremely difficult for OPEC to sustain higher prices."

Powerful OPEC kingpin Saudi Arabia has stated several times that it regards 75 dollars as a "fair price" for crude.

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US dollar rises against euro, yen despite banking concerns

The US dollar rose on Monday against the euro and yen despite persistent concerns over the troubled American banking system.

The euro dipped to 1.2692 dollars as at 2200 GMT in New York trading from Friday's close of 1.2824 dollars.

The dollar also advanced to 94.58 yen from 93.29.

The greenback was lower in early trading on markets concerns of possible nationalisation of leading American banks amid speculations that Citigroup could be the primary candidate for takeover by the government.

But a statement from the US Treasury Department that the government would seek to avoid nationalisation of troubled banks under a new capital aid programme to be launched on Wednesday sent the dollar rising again even if nationalisation concerns persisted, analysts said.

"The initial reaction to nationalisation may continue to prove dollar negative, but we find the argument ... dubious at best," said Boris Schlossberg, director of currency research at Global Forex Trading.

"Under nationalisation, Citi equity and bondholders would be the ones to suffer the most, while the US taxpayer could in fact profit in the long run if the US government were to pick up all of Citi's global infrastructure at pennies on the dollar and then recapitalise that asset ultimately creating value," he said.

The euro was also weak due to worries over the European financial sector's own problems, offsetting the dollar negative news, Schlossberg said.

Comments by several European Central Bank officials that additional interest rates cuts were likely also kept the euro under pressure.

John Sylvia of PNC bank said further weighing on the euro were concerns over the troubled economies of Eastern Europe, which were largely financed by loans from Western European banks.

Amid a global recession, the booming Eastern European economies have seen a dramatic drop off in demand for their goods, dampening their cash flow and possible repayment of their foreign currency loans, he said.

"If the rising default rate of these foreign currency loans continues, the Western European countries may be forced to further bailout their respective eurozone banks," Sylvia said.

"Such a prospect would surely lead to further downgrades of Western European countries, continuing to pressure the euro lower."

In late New York trading, the dollar rose to 1.1685 Swiss francs from 1.1563 on Friday.

The pound was up slightly to 1.4485 from 1.4421 on speculation of improvements within Britain's financial sector, said Kathy Lien of Global Forex Trading.

"Some banks are showing efforts in the purification of their finances as to improve their positions once economic conditions rebound," she said.

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US may boost stakes, wants to keep banks private

US authorities on Monday unveiled details of a new aid plan for struggling banks that could lead to bigger government stakes but with a "strong presumption" that financial firms "remain in private hands."

Amid growing speculation about nationalisation, authorities said the Capital Assistance Programme would offer "mandatory convertible preferred shares," that could be turned into common shares "only as needed over time to keep banks in a well-capitalised position."

Analysts said the plan is the first step in the so-called "stress test" announced by the administration of President Barack Obama for banks hammered by the US housing meltdown and global credit crisis.

Augustine Faucher at Economy.com said the measures "set the stage for the federal government to take a greater ownership role in major US banks that face funding problems, short of total government ownership."

"The Obama administration is trying to avoid completely nationalising banks, while making sure they have enough capital to survive," Faucher said.

A joint statement from the US Treasury, Federal Reserve and banking regulators said that under the new program initiated on Wednesday, "the capital needs of the major US banking institutions will be evaluated under a more challenging economic environment."

The statement added that "because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Programme is that banks should remain in private hands."

The statement provided no details on capital injections to individual banks despite reports that the government might effectively nationalise some large banks on the brink of insolvency.

"The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth," the statement said.

"Moreover, we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments."

But it said the preferred, nonvoting shares already injected into key banks could be converted into common shares under certain conditions.

"Should that assessment indicate that an additional capital buffer is warranted, institutions will have an opportunity to turn first to private sources of capital," it added.

"Otherwise, the temporary capital buffer will be made available from the government. This additional capital does not imply a new capital standard and it is not expected to be maintained on an ongoing basis."

The new capital would "provide a cushion against larger than expected future losses."

Any government capital "will be in the form of mandatory convertible preferred shares, which would be converted into common equity shares only as needed over time to keep banks in a well-capitalised position and can be retired under improved financial conditions before the conversion becomes
mandatory," the statement said.

The government could also convert shares obtained from capital injections under the Bush administration's Troubled Asset Relief Program, the statement added.

Kevin Giddis at Morgan Keegan called the plan "a good move for the banks and possibly bondholders, likely bad news for those who own shares in banks because of the dilution" of the shares.

Earlier, reports said the US government was in talks that could lead to a 25-40 percent government stake in Citigroup.

The Wall Street Journal reported Sunday that one plan would allow a portion of the 45 billion dollars in preferred shares held by the US government to be converted to common stock.

The government obtained a 7.8-percent stake in the bank in return for pumping capital into Citigroup.

The stock conversion would not cost the US Treasury additional money, but other Citigroup shareholders would see their shares diluted, the report said.

The paper said the talks reflect a growing fear that Citigroup and other big US banks could be overwhelmed by losses amid the recession and housing crisis.

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Obama vows to halve massive budget deficit

President Barack Obama on Monday vowed to halve by 2013 the huge budget deficit bequeathed by the Bush White House, warning inaction would leave Americans wallowing in debt and thwarted dreams.

Obama pivoted from imploring lawmakers to dish out billions of dollars in stimulus funds to warning of the consequences of buckled US government balance sheets, opening yet another high-stakes week for his young presidency.

He warned that trying to revive the crisis-wracked US economy with his 787 billion dollar economic kick-start plan would be futile without a determined drive to also bring deficits already topping a trillion dollars under control.

"Today, I am pledging to cut the deficit we inherited by half by the end of my first term in office," Obama said, as he opened a "Fiscal Responsibility Summit" with lawmakers, business figures and academics at the White House.

"If we confront this crisis without also confronting the deficits that help cause it, we risk sinking into another crisis down the road," Obama said.

The president warned that years of deficits would undermine confidence in the US economy, cause interest payments on US debt to go up and saddle future generations of Americans with huge debts.

On Tuesday, Obama will take centre stage in a primetime address to a joint session of Congress in a priceless opportunity to directly lay out his political programme and recovery plans to Americans outside Washington.

On Thursday, the president will take the wraps of his first budget, ushering in a prolonged period of political horse-trading on Capitol Hill.

Public attempts to curtail runaway budget deficits come with Obama facing a barrage from critics who say the stimulus plan signed into law last week is packed with bloated, budget-busting spending.

The federal budget deficit is already projected to grow to 1.2 trillion dollars this year, without the stimulus spending, and there are fears a new and era of mushrooming government debt could undermine any economic recovery.

In a concerted political offensive, Obama earlier called on governors from most of the 50 US states to work with him to prevent waste in disbursing the billions of dollars in stimulus funds, at a meeting at the White House.

"We are addressing the greatest economic crisis we have seen in decades by investing unprecedented amounts of the American people's hard-earned money," he said.

"With that comes an unprecedented obligation to do so wisely, free from politics and personal agendas.

"On this, I will not compromise or tolerate shortcuts."

The president also rebuked Republicans, including governors in the room with him on Monday, who raised red flags at aspects of the stimulus plan, warning they must not exploit America's economic plight for political gain.

"I just want to make sure that we're having an honest debate in presenting to the American people a fulsome accounting of what is going on in this programme," Obama said.

Then, looking towards Louisiana Governor Bobby Jindal, a critic of the stimulus plan and a possible future Republican presidential candidate, Obama added: "What I don't want us to do, though, is to just get caught up in the same old stuff that inhibits us from acting effectively and in concert.

"There's going to be ample time for campaigns down the road."

Obama also announced the appointment of veteran government cost-cutter Earl Devaney to scythe through any wasteful spending of stimulus funds and warned he would call governors to account for funds that were frittered away.

He unveiled the release of 15 billion dollars in stimulus funds to help safeguard medical payments for low income patients, in an attempt to alleviate the financial burden on states hammered by the economic crisis.

And he put Vice President Joe Biden in charge of implementing the stimulus law.

Obama aides said at the weekend that the president planned to use raised taxes on the rich and cut war spending in a bid to halve the deficit by 2013.

According to The New York Times, the president is proposing to tax investment income of hedge fund and private equity partners at ordinary income tax rates instead of the capital gains rate, which does not exceed 15 percent.

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Stocks plunge, bank plan fails to calm Wall Street

Wall Street stocks plunged to their lowest close in nearly 12 years on investor disappointment with the latest plan from Washington to prop up the ailing US banking system.

The Dow Jones Industrial Average sank 250.89 points (3.41 percent) to 7,114.78, crashing below its November bear market low and hitting its lowest close since May 1997.

The blue-chip index has fallen by nearly half since its record in October 2007 of 14,198.10.

The broad-market Standard & Poor's 500 index shed 26.72 points (3.47 percent) to 743.33, its lowest finish since April 1997.

The tech-heavy Nasdaq composite slid 53.51 points (3.71 percent) to 1,387.72, its lowest level since November 2008.

Market action came as US authorities unveiled plans for a "capital buffer" for ailing banks but said the programme would seek to avoid nationalisation.

A joint statement from the US Treasury, Federal Reserve and banking regulators said the new lifeline being offered could lead to bigger government stakes but with a "strong presumption" that banks "remain in private hands."

"The government's reassurances contributed to an early morning rally, but the buying mood didn't last long," said Elizabeth Harrow at Schaeffer's Investment Research.

Marc Pado, a stock analyst at Cantor Fitzgerald, said the market had hoped for more clarity on the Obama administration's plan to rescue the banking system.

"The market is still having trouble with the idea that we're not getting the clarity that its needs for the financial system," he said.

"It's good news for the banks that the government is saying that they approved more bailout funds, but that's not a plus for the market that the banks need bailout funds."

Some key banking shares rose on the news but the overall market sank amid growing fears that the financial system would remain hobbled, stifling economic growth.

"The 'no nationalisation' talk failed to help keep the broad market afloat," said Jon Ogg at 24/7 Wall Street.

"The breath of relief was quickly replaced by more flight," he said.

"It feels as though the rest of the air is coming out of the market as Joe Public throws in the towel."

Tech shares weakened on economic fears, with Hewlett-Packard off 6.27 percent at 29.28 dollars and IBM down 4.98 percent at 84.37.

General Electric slumped 5.65 percent to 8.85 dollars after Deutsche Bank analysts said it used a presumption that the GE financial services arm would have to be valued at "zero" due to the credit crisis.

In the banking sector, Citigroup rallied 9.74 percent to 2.14 in a positive reaction to reports that the government could boost its stake in the troubled giant to up to 40 percent to avert its collapse.

Bank of America rose 3.17 percent to 3.91 dollars.

Ailing auto giant General Motors ended unchanged at 1.77 dollars following reports that advisors of US Treasury have started lining up tens of billions of dollars in bankruptcy financing for it and Chrysler.

Ford surged 9.5 percent to 1.73 dollars after it reached an agreement with the United Auto Workers union on changes to pension benefits of workers.

Bonds were mixed. The yield on the 10-year US Treasury bond rose to 2.777 percent from 2.772 percent on Friday while that on the 30-year bond dropped to 3.525 from 3.565 percent.

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Advisers readying bankruptcy financing for US automakers

Talks are underway to secure what would be the largest-ever US bankruptcy loan for General Motors and Chrysler, in the event that the struggling US automakers opt to file for Chapter 11 protection, The Wall Street Journal reported Monday.

The daily reported that discussions are underway between lenders and advisers to the US Treasury Department, who work outside the US government.

Citing "people familiar with the matter," the newspaper said the package could exceed 40 billion dollars.

The two automakers received more than 17 billion dollars in bailout money from the US government last year and have publicly said that bankruptcy was not on the table.

But people involved in talks with senior Obama officials said the administration believes that Chapter 11 filings are an option that should be given serious consideration.

"Everything is on the table right now," the paper quotes one unnamed person involved in the matter as saying.

The discussions call for private banks to provide financing -- known as a debtor-in-possession loan -- with the government guaranteeing it, the report said.

Under this scenario, some of the financing would be used to repay the 17.4 billion the government lent GM and Chrysler last year.

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European economies agree on need for greater regulation

The heads of Europe's largest economies agreed on Sunday on the need for greater regulation of stock markets and to double the IMF's funding in order to avoid a repeat of the finance crisis.

The leaders of Britain, France, Germany, Italy, Spain and the Netherlands met in Berlin to hammer out a joint European stance for the Group of 20 meeting of developed and developing countries in London on April 2.

They agreed that "all financial markets, products and participants - including hedge funds and other private pools of capital which may pose a systemic risk - must be subjected to appropriate oversight or regulation," a summary of the meeting said.

The leaders also agreed to add an extra 250 billion dollars, doubling the current level of funding, to the International Monetary Fund (IMF) budget to allow it to intervene to prevent future financial crises.

British Prime Minister Gordon Brown said such a reinforced IMF would be able to help countries in central and eastern Europe which are swept up in a growing economic crisis as western European banks withdraw credit.

"We need international action to help for example in central and eastern Europe where a number of foreign banks have withdrawn to their home banking territories and where it is difficult to recapitalise the rest of the banking system and restructure it without the support of the international financial institutions," Brown told a news conference with his European counterparts.

"So we are proposing today... a 500-billion-dollar (390-billion-euro) IMF fund that enables the IMF not only to deal with crises when they happen but to prevent crises."

French President Nicolas Sarkozy said the stakes for the April summit - which will be attended by US President Barack Obama - were high.

"By April 2, we have to succeed and we cannot accept that anything or anyone gets in the way of that summit which will bear a historical responsibility... if we fail there will be no safety net," he said.

German Chancellor Angela Merkel said the Europeans were determined that a strengthened, better-regulated financial system would emerge from the wreckage of the deepest financial crisis for decades.

"It's not a case of talking up the situation but we want to send the message that we have a real opportunity to come out strengthened from this crisis," she said.

Merkel admitted that details of how hedge funds and complex financial products would be regulated still needed to be worked out.

But the stance on hedge funds - highly speculative and lightly regulated entities that have been accused of fuelling instability in financial markets - represents a shift in the long-held position of countries such as Britain.

London had previously resisted greater regulation of such funds, which supporters say benefit the economy by bearing risks that others are unwilling to take, although Brown has recently called for stronger rules.

A German government source said the need for direct regulation of hedge funds "is no longer questioned by any of the participants."

The world's major economic powers are under pressure to build on pledges made at the G20 summit in Washington in November, where they formulated an action plan for fighting the crisis.

But the global recession has worsened since then, prompting governments to push through massive economic stimulus packages and overshadowing efforts to reform the global financial system.

The national stimulus plans have sparked fears of protectionism which could hinder efforts to present a united European front.

The end-of-meeting statement however gave a watered-down assessment of protectionism, saying that Europe would only take "measures that keep distortions to competition to an absolute minimum, and we expect the other G20 states to behave likewise."

The results of Sunday's meeting will be discussed by all 27 European Union members at summits in March.

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China's fiscal deficit set to hit record high in 2009

China's fiscal deficit is set to hit a record high this year, as the global crisis shrinks revenues while forcing the government to spend more on pump-priming, local media said.

The finance ministry has foreseen a deficit of 950 billion yuan (US$139 billion) in its draft budget for 2009, the China Business newspaper reported over the weekend.

The figure is nine times higher than a deficit of 111 billion yuan in 2008, and it accounts for about three per cent of the overall economy, which is an internationally recognised alarm level, the paper said.

"It's absolutely possible," said Wang Qian, an economist with JP Morgan in Hong Kong, when asked if the deficit sounded realistic.

"This year, there's nothing surprising in a fiscal deficit of three per cent of the economy," she said.

China Business said the deficit will result from fiscal spending in 2009 topping 7.6 trillion yuan, up 22.1 per cent from 2008, as the government plans to raise investment in 15 sectors including housing and transportation.

Meanwhile, the finance ministry forecasts fiscal revenue to reach 6.6 trillion yuan this year, as the growth rate is expected to slow sharply from last year's 19.5 per cent to eight per cent this year.

China unveiled a massive four-trillion-yuan spending programme in late 2008 to revive the economy and this year has issued or is expected to soon introduce more incentives for 10 sectors such as autos and petrochemicals.

The 2009 budget, with is record-breaking deficit, will be up for a vote at China's parliament, the National People's Congress, which opens next week.

No budget has ever been passed by anything but a crushing majority by the nation's 3,000-member rubberstamp legislature.

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39,000 lose jobs in Philippines in four months

At least 39,000 Filipinos have lost their jobs since October last year as factories and companies slash jobs amid the deepening global financial crisis, an official said Monday.

The 39,000 included more than 5,400 overseas-based Filipinos who had lost their jobs in the Middle East and Taiwan, which accounted for the bulk of the returning expatriates, Labour Secretary Marianito Roque said.

He said the figure was based on official reports by industry leaders as well as trade groups, he said.

He said the government has allotted seven billion pesos (US$149 million) to create 180,000 "emergency jobs" this year as a stop-gap measure to prevent unemployment from ballooning.

"As of last Friday we have about 39,000 fall outs. These are workers who have lost their jobs mainly in the electronics and manufacturing sector," Roque told the Foreign Correspondents Association of the Philippines.

He said the government has enough resources to create temporary employment opportunities in the next two years, but will be hard pressed if the crisis extends beyond that.

Roque noted that many Filipinos lost their jobs in the real estate and services sector in Dubai, but have managed to find employment elsewhere in the United Arab Emirates.

He said of the estimated 300,000 Filipinos in the Emirates, 2,000 were now out of work.

Job orders for Filipino nurses in the United States is also "dropping" with only 700 contracts up for grabs last year, compared with up to 8000 available three years ago, he said.

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Asian finance meeting agrees to expand crisis fund

Asian finance ministers meeting here agreed to boost by 50 percent a multi-billion dollar emergency fund to fight off the global downturn, officials said Sunday.

The proposal was agreed at a ministerial meeting of the Association of Southeast Asian Nations (ASEAN) and China, Japan and South Korea and will be finalised later this year, they said.

"The total size of the Multilateralised Chiang Mai Initiative will be increased from the initially agreed level of 80 billion dollars to 120 billion dollars," an official statement said.

The meeting was called to discuss ways of softening the impact of the economic crisis, with expanding the Chiang Mai Initiative foreign exchange pool -- an emergency credit line for ASEAN countries -- at the top of the agenda.

The statement said the move to expand the fund aimed "to ensure regional market stability and to foster confidence in the markets," and would be finalised at another meeting of finance officials this year in Bali, Indonesia.

The proposal will also likely be discussed at the annual ASEAN summit, which will be held from Friday in the Thai resort town of Hua Hin, although there is no time frame for when the expanded fund will be operational.

Ministers and officials from ASEAN's Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam met Sunday with Chinese and South Korean finance ministers and a top Japanese official.

ASEAN's 10 member states plus China, Japan and South Korea agreed after the 1997-98 Asian financial crisis to set up the Chiang Mai Initiative bilateral currency scheme to prevent a repeat of the turmoil.

The Asian nations now want to expand that agreement into a multilateral reserve pool, as the current economic climate threatens millions of jobs as well as recent robust growth in the developing economies.

A multi-nation scheme of currency swaps aims to make it easier for countries to borrow emergency funds.

The statement said the ASEAN members would contribute 20 percent of the pool with larger economies Thailand, Malaysia, Indonesia, Singapore and the Philippines giving a bigger share.

The remaining 80 percent will come from the big three Asia economies, and Chinese Finance Minster Xie Xuren told reporters that China, South Korea and Japan were still discussing how they would divide up the sum.

ASEAN Secretary General Surin Pitsuwan said earlier the regional fund would be used to help members "badly affected" as the downturn hits Asia's key trading partners in the United States and Europe.

"It is one of the mechanisms -- it is not to replace or compete with the IMF (International Monetary Fund), but it will be an alternative for Asian countries," Surin said on Thai television.

"If it materialises, it will be one of ASEAN's most tangible achievements."

Thai premier Abhisit Vejjajiva said earlier the fund would "serve as a cushion against future weaknesses at the time of the crisis."

Sunday's meeting also agreed to strengthen the region's monitoring and surveillance of the world economic climate, and stressed the importance of expanding bond markets in ASEAN.

"We believe that proactive and decisive policy actions are required in order to restore confidence, financial stability and promote a sustainable economic growth in the region," the statement said.

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Oil prices slip on global energy demand jitters

Oil prices slipped on Friday in a market shaken by worries over slumping energy demand as the global economy grinds to a near halt under a spreading financial crisis.

New York's main futures contract, light sweet crude for delivery in March, fell 54 cents to close at 38.94 dollars per barrel. The contract expired at the close.

In London, Brent North Sea crude for April delivery shed 10 cents to settle at 41.89 dollars a barrel.

Andy Lipow at Lipow Oil Associates said that oil prices were echoing sell-offs in equities markets.

Earlier the New York contract had lost more than two dollars as Wall Street's blue-chip Dow Jones Industrial Average plunged about 200 points.

The modest loss in closing oil prices followed Thursday's sharp rebound after the US Energy Information Administration (IEA) posted a surprise fall in US crude reserves, raising hopes for renewed demand in the world's biggest energy consumer.

New York crude rallied almost five dollars and Brent oil jumped more than two dollars after the IEA said US crude stocks fell 200,000 barrels in the week to February 13, after several weeks of big increases.

However, a greater-than-expected rise in gasoline stockpiles indicated that energy demand was still low, according to traders.

"Despite the run-up yesterday, the pressure emanating from global equities is still permeating the commodities world and causing downward pressure along the entire curve," said analysts at BMO Capital Markets.

The next New York benchmark contract, for delivery in April, could rapidly face pressure, analysts warned. It closed Friday at 40.03 dollars.

Global equities plunged again on Friday amid deep concern over the troubled financial sector and the worldwide downturn.

"Fears over a deteriorating global economic outlook sent equity markets tumbling... as investors shed riskier positions, with oil prices tracking them lower amid weakening demand concerns," said Sucden analyst Nimit Khamar.

Last week, the Organisation of the Petroleum Exporting Countries, the cartel that pumps about 40 percent of the world's oil, trimmed its forecasts for global oil demand for 2009 by 0.67 percent because of "economic depression" in industrialised countries.

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Euro firms against US dollar in profit taking

The euro firmed against the US dollar on Friday as traders took profit at the end of a week riven with worries over US economic rescue efforts and the crisis in Central and Eastern Europe.

The euro traded at 1.2824 dollars at 2200 GMT, compared with 1.2673 dollars late Thursday.

But the single European currency weakened against the Japanese yen, falling to 119.63 yen against 119.35 yen.

The dollar also fell against the yen, to 93.29 yen from 94.18 yen.

"The euro jumped during the US trading session as European Central Bank Governing Council member Ewald Nowotny said that cutting interest rates down to zero was 'neither desirable nor needed,' suggesting that the ECB's dovish bias may be fading quickly," said Terri Belkas, an analyst at Forex Capital Markets.

Belkas noted the markets were still expecting the ECB to slash a half percentage basis point from its key interest rate on March 5, citing signals from various other ECB members in recent weeks.

The euro earlier had slid against the dollar because of mounting economic troubles in the recession-hit eurozone on a day that saw European stock markets plunge, with London's FTSE 100 index losing 3.22 percent.

Investors were also nervous about rescue plans in Germany, which on Friday adopted its biggest economic stimulus since World War II, and new data showing business activity in the eurozone hitting a record low in February.

The eurozone's purchasing managers' index (PMI), compiled by data and research group Markit, plunged to 36.2 points from 38.3 points in January, with output, new orders, employment and prices all down.

"February's sharp drop in the eurozone PMI indices suggests that it is too soon to judge that the region is over the worst of the economic downturn," said Capital Economics analyst Ben May.

Investors also sold the euro after German Chancellor Angela Merkel declined to comment on whether Berlin would offer help for any eurozone country in financial trouble, dealers said.

Her comments doused earlier speculation that Germany might signal it was ready to bail out any fellow eurozone member in dire straits.

"Merkel's comments prompted investors to sell the euro. Things are going from bad to worse" in Europe, said Daisuke Uno, an analyst at Japan's Sumitomo Mitsui Banking Corp.

"The eurozone has seen lots of trouble this week," he added.

Investors are worried about the debt mountains of countries such as Ireland, Greece and Portugal, as well as the exposure of eurozone banks to the economic woes of Central and Eastern Europe.

In late New York trading, the dollar fell to 1.1563 Swiss francs from 1.1735 late Thursday.

The pound was at 1.4421 dollars against 1.4293.

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US stocks end lower on bank nationalisation fears

US stocks dived deeper into six-year lows on Friday on rumours of bank nationalisation which President Barack Obama's administration moved to quash.

The Dow Jones Industrial Average fell 100.28 points (1.34 percent) to 7,365.67 after a sharp sell-off on Thursday.

The tech-dominated Nasdaq dropped 1.59 points (0.11 percent) to 1,441.23 and the broad-market Standard & Poor's 500 index shed 8.89 points (1.14 percent) to 770.05.

The stock market was down more than three percent before rallying in late trading as fears for the banking system eased.

Since the opening bell, traders were concerned about the plight of the banks saddled with losses stemming from a home mortgage crisis that has triggered global turmoil.

"The pain continued on Wall Street today. Financial stocks were hurt by persistent fears that banks might be nationalised and dividends cut," said Wachovia Securities chief market strategist Al Goldman.

"Today's session was highly volatile, reflecting fear about the future of the financial system," experts at Charles Schwab & Co wrote.

Stocks recovered slightly after the White House moved to calm market fears, saying banks should remain under private control.

"This administration continues to strongly believe that a privately held banking system is the correct way to go," White House spokesman Robert Gibbs told reporters.

After the market closed for the week, the US Treasury also rejected the nationalisation speculations.

"There are a lot of rumours in the market, as always, but you should not regard these as any indication of the policy of this administration," said a Treasury spokesman.

"As (Treasury) Secretary (Timothy) Geithner has said, we will preserve a financial system that is owned and managed by the private sector," he said.

Weighing on investor sentiment "is the angst over the spectre of mega banks Citigroup and Bank of America possibly being nationalised in the foreseeable future," said Patrick O'Hare, Briefing.com.

"Whether that actually happens remains to be seen, but their stocks are acting as if it is a distinct possibility," he said.

Citigroup was down 22.31 percent to 1.95 dollars and Bank of America fell by 3.56 percent to 3.79 dollars.

JPMorgan Chase lost 3.40 percent to 19.90 dollars and Wells Fargo down 9.16 percent to 10.91 dollars.

General Electric, which recently reported lower profit, fell 6.76 percent to 9.38 dollars.

Bonds rose. The yield on the 10-year US Treasury bond fell to 2.772 percent from 2.857 percent on Thursday while that on the 30-year bond dropped to 3.565 percent from 3.688 percent. Bond yields and prices move in opposite directions.

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Asia shares fall on gloomy US data

Asian shares fell Friday, with banking stocks hardest hit on concerns over a global liquidity crunch after Wall Street tumbled to six-year lows in the wake of gloomy economic data.

Tokyo's benchmark Nikkei-225 index slumped 1.87 per cent to a near four-month low while the broad-market index fell to its lowest point in 25 years.

Investors took their cue from New York, where the Dow Jones Industrial Average fell 1.19 per cent Thursday, closing at the lowest level since October 9, 2002.

Markets across Asia were spooked by a raft of data underscoring the deepening US recession. The gloomiest report showed continuing claims for unemployment benefits rising by 170,000 to 4.987 million for the week ending February 7.

"With economic worries mounting again, investors are moving to reduce their risky assets," said SMBC Friend Securities strategist Hideaki Higashi in Tokyo.

Hong Kong fell 2.5 per cent, Singapore lost 2.1 per cent, Sydney slid 1.4 per cent and Seoul dropped 3.7 per cent.

"Few can be sure when the market will ride out the current economic meltdown at home and abroad," Concord Securities analyst Allen Lin said in Taipei, where the market slipped 2.03 per cent.

Shanghai was the only bright spot in a sea of red, rising 1.54 per cent as new industry stimulus measures by the Chinese government boosted sentiment.

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US consumer prices rise 0.3% in January

US consumer prices rose in January for the first time in six months, but annual inflation was flat, the weakest level in more than half a century, government data showed on Friday.

The Labour Department said its consumer price index (CPI) rose 0.3 percent in January, matching analysts' consensus forecast, after falling 0.8 percent in December.

The CPI headline number had fallen in the prior three months and was unchanged in August and September. The last time it climbed was in July, by 0.7 percent, when crude oil prices hit all-time highs.

On an annual basis, there was no change from the January 2008 CPI, the weakest reading since August 1955, the department said.

In 2008, December annual inflation rose a meagre 0.1 percent after reaching the year's peak at 5.6 percent in July.

Core CPI, which strips out volatile food and energy prices, rose 0.2 percent in January from December, slightly higher than the 0.1 percent increase expected. On a 12-month basis, core inflation was up 1.7 percent.

Core inflation in December had been unchanged from November.

The rise in consumer prices was led by increases in energy prices, which climbed 1.7 percent in January after falling 9.3 percent in December. Energy prices were a hefty 20.4 percent lower from a year ago.

Gasoline prices surged 6.0 percent from December, but were 40.4 percent lower than in January 2008.

Consumer food prices edged up 0.1 percent on a monthly basis and were 5.2 percent higher than a year ago.

Analysts dismissed the monthly rise in inflation, saying prices seemed to be trending downward.

"Disinflationary pressures slowed down with the modest rebound in energy prices. However, inflation should continue to decrease in the coming months, turning negative for most of 2009," said Elsa Dargent, an analyst at Natixis.

Ian Shepherdson, chief US economist at High Frequency Economics, also saw prices continuing to fall as the economy sinks into its second year of recession.

"Disinflation pressure is still intense and will stay that way for some time," Shepherdson said. Disinflation is a decrease in the inflation rate.

On Thursday, the Labour Department reported US wholesale prices rose 0.8 percent in January after five months of decline, driven by higher energy prices.

But on an annual basis, the pipeline inflation number fell 1.0 percent from January 2008, after declining 0.9 percent in December.

The Labour Department separately reported Friday that weekly salaries fell 0.1 percent in January from December but had climbed 3.4 percent from January 2008.

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Oil prices soar on surprise fall in US crude stocks

Crude oil prices sharply rebounded on Thursday on data showing a surprise fall in US crude reserves that raised the prospect of renewed demand in the world's biggest energy consumer.

New York's main futures contract, light sweet crude for delivery in March, finished at 39.48 dollars a barrel, up a hefty 4.86 dollars from Wednesday's closing level.

In London, Brent North Sea crude for April delivery settled 2.44 dollars higher at 41.99 dollars a barrel.

The US government's Energy Information Administration (EIA) said on Thursday that American crude stockpiles fell 200,000 barrels in the week ending February 13, after several weeks of significant increases.

The EIA said that US gasoline reserves increased by 1.1 million barrels last week, instead of the consensus analyst forecast of a 600,000-barrel drop.

Stockpiles of distillates, including diesel and heating fuel, slid 800,000 barrels, roughly in line with market expectations.

The EIA report - published a day later than normal due to a US public holiday on Monday - is a key focus because the United States is the world's biggest energy-consuming nation. The world's largest economy has been mired in recession for more than a year, dampening demand.

Morgan Stanley analysts Hussein Allidina and Seth Kleinman cautioned against reading the unexpected increase in US crude stockpiles as the beginning of a rebound in demand.

"Despite the hopes being pinned on President (Barack) Obama's stimulus package, we discount a demand response in the near term," they wrote in a client note.

"We are bearish on the entire crude oil complex and believe that OPEC needs to further curtail production in an effort to put a floor under prices."

Oil prices have slumped from record highs above 147 dollars a barrel last July, as the market has been hit by plunging energy demand because of the global economic slowdown.

On Wednesday, the US Federal Reserve projected the US economy would shrink 0.5 percent to 1.3 percent in 2009 and unemployment would rise to 8.5 percent or higher.

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