Obama forecasts gloom as Brown comes to visit

NEW YORK (Reuters) - U.S. President Barack Obama forecast a dismal first quarter on Tuesday ahead of a visit by Prime Minister Gordon Brown, who is calling for a "global New Deal" to help rescue the world economy.

Obama joined leaders from the OECD group of developed countries and the International Monetary Fund in predicting a difficult way out of the crisis, which Federal Reserve Chairman Ben Bernanke said required still more bold steps to prevent a costly, long-term catastrophe.

"The economy's performance in the last quarter of 2008 was the worst in over 25 years. And frankly the first quarter of this year holds out little promise for better returns," Obama said in a speech.

Brown's visit to Obama is the first by a European head of state since the president took office on January 20. The leader is expected to press Obama for details on Washington's plans for fixing the U.S. financial sector.

"This is a global problem. It needs global solutions," Brown said, invoking former U.S. President Franklin Roosevelt's New Deal policies during the Great Depression in the 1930s.

The turmoil that world leaders face is worse than thought just over a month ago, the Organisation for Economic Cooperation and Development warned as world stock markets remained stuck at 12-year lows.

"The recession will deepen ... there's no doubt ... I think this quarter will be the worst quarter of all," Klaus Schmidt-Hebbel, chief economist for the OECD, told Reuters.

"(It will be) significantly deeper and more protracted -- meaning longer than what is embodied in the IMF forecasts," Schmidt-Hebbel said.

The IMF on Monday had already said it was likely to downgrade its global 2009 growth forecast.

The FTSEurofirst 300 stock index fell 1.6 percent on Tuesday to its lowest close since the index's inception in July 1997. U.S. stocks had opened higher after sliding to 12-year lows on Monday -- but then resumed their decline due to lingering uncertainty.

BERNANKE ON THE HILL

With trillions of dollars in public funds already pledged worldwide to reinvigorate credit markets, recapitalize banks and stimulate demand, Bernanke told a Senate committee that continued action was crucial, even if it meant a surge in U.S. government debt.

"We are better off moving aggressively today to solve our economic problems," Bernanke said. "The alternative could be a prolonged episode of economic stagnation that would not only contribute to further deterioration in the fiscal situation, but would also imply lower output, employment and incomes for an extended period.

EURO ZONE VOWS TO HELP ITS OWN

The 16-member euro zone pledged to bail out any of its struggling members before turning to the IMF for help.

"If crisis emerges in one euro zone country, there is a solution ... before visiting the IMF," EU Monetary Affairs Commissioner Joaquin Almunia said.

"We are equipped politically and economically to face this crisis scenario," Almunia said.

The European Union is working to overcome divisions that have prevented it from reaching a comprehensive bailout for Central and Eastern Europe, where Western Europe banks have lent an estimated $1.7 trillion (1.2 trillion pounds).

In Canada, the Bank of Canada cut its main interest rate by a half point to a record low of 0.5 percent, as had been expected, and signalled that it may take extra steps to pump money into a system that remains stubbornly short of credit.

Earlier in the day, Australia's central bank held its interest rates steady at 3.25 percent, defying expectations of a cut, saying stimulus already under way was helping the country avoid the depths of recession seen elsewhere.

Japan also took aim at funds for companies on Tuesday, saying it would lend $5 billion from its hefty foreign reserves to a state-backed bank charged with funnelling funds to firms in trouble.

The world's biggest automaker, Toyota Motor Corp, said a financial services unit had applied for funds, with Japanese state-run broadcaster NHK reporting the firm was seeking 200 billion yen (1.5 billion pounds).

(Reporting by Reuters bureaus worldwide; Editing by Jonathan Oatis)