The United States Federal Reserve and foreign central banks moved on Monday to pump billions of dollars to cash-strapped banks at home and abroad in a dramatic bid to break through a credit clog and spur lending.

The Fed said the action is intended to "expand significantly" the cash available to financial institutions, its latest effort to relieve the worst credit crisis since the Great Depression.

The goal is to boost the amount of quick cash available to banks and other financial institutions so that they will feel more confident and inclined to lend not only to each other, but also to people and businesses.

Credit

Credit is the economy's lifeblood.

The global credit clog - which started a year ago and grew much more severe in the past few weeks - has made it increasingly difficult for people and businesses to borrow money.

The crisis - if it persists - could plunge the economy into a recession, President Bush and Fed Chairman Ben Bernanke have warned.

The Fed action came hours before the House defeated a US$700 billion financial bailout plan, ignoring urgent pleas by Bush and Bernanke to move swiftly.

The plan was designed to break through a dangerous credit clog that has threatened to freeze up the entire financial system and throw the economy into a recession.

Rotten assets

At the heart of the plan, the government would buy bad mortgages and other dodgy debts held by banks and other financial institutions.

By getting those rotten assets off their books, financial institutions should be in a better position to raise capital and boost lending, supporters contend.

The Fed's action on Monday expands programmes already in place.

It is unclear whether it will break through the credit bottlenecks. Its previous actions - including steps along these lines - have provided relief, but haven't halted the crisis.

Against this backdrop, central banks will continue to work closely and are prepared to take "appropriate steps as needed" to ease the crisis and get banks lending again, the Fed said.

On Wall Street, stocks dropped sharply even after the Fed's announcement.

The Dow Jones industrials plunged 777 points - their largest point drop ever - or almost seven per cent.

The Standard & Poor's 500 index declined 8.51 per cent and the technology-heavy Nasdaq composite index fell 9.14 per cent.

Under one new step, the Fed will boost the amount of 84-day cash loans available to US banks.

Banks bid

The Fed is increasing the amount to US$75 billion, up from the current US$25 billion starting on October 6. Banks bid on a slice of the loans at an auction.

That move will triple the supply of 84-day loans to US$225 billion, from US$75 billion, the Fed said.

Meanwhile, the Fed will continue to make US$75 billion worth of shorter, 28-day loans available to banks.

All told, the total amount of cash loans - 84-day and 28-day - available to banks will double to US$300 billion from US$150 billion, the Fed said.

Moreover, the Fed made an extra US$330 billion available to other central banks.

That boosted to US$620 billion the total amount available to the central bank through currency "swap" arrangements, where dollars are traded for their currencies.

That total is up from US$290 billion previously being made available through such arrangements.

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Swiss National Bank and the central banks of Denmark, Norway, Australia and Sweden are involved in those swap arrangements.

"We are experiencing a massive credit implosion," said TJ Marta, a fixed-income strategist at RBC Capital Markets.

The move comes as the US financial meltdown's tendrils have ensnared banks in Britain, the Benelux and Germany.

By pledging to provide "a very large" cash infusion, the Fed hopes the actions will "reassure financial market participants."

- AP