Wall St. woes force U.S. to seek cash for Fed

By Glenn Somerville and Jamie McGeever

WASHINGTON/LONDON (Reuters) - The U.S. government sought to raise $40 billion (22 billion pounds) on Wednesday to help its central bank finance a rescue plan for insurance giant AIG as the cost of staving off crisis on Wall Street soared.

Other central banks also battled to restore confidence on financial markets as share prices gave up brief gains they had made on news of the AIG bailout and the cost of short-term borrowing remained high in interbank markets.

The U.S. Treasury Department said it was selling $40 billion of cash management bills -- effectively new debt -- at the request of the Federal Reserve to help the central bank "better manage their balance sheet", as a Treasury statement put it.

Asian central banks ploughed extra liquidity into short-term funding markets, though many central banks in Europe took their foot off the pedal amid signs of a respite from the sharp surges in short-term borrowing costs seen in the previous two days.

The Bank of England said it would allow banks an extra three months to swap risky assets for government paper, extending a scheme that was set to close next month because of the latest turmoil in financial markets..

Dominique Strauss-Kahn, head of the International Monetary Fund, said there could well be more trouble in what former U.S. Treasury Secretary Robert Rubin dubbed "the worst crisis since the 1930s".

"The consequences for some financial institutions are still in front of us," Strauss-Kahn told reporters in Saudi Arabia.

Overnight, news broke that the U.S. authorities had come up with the rescue of American International Group (AIG) just two days after choosing to allow investment bank Lehman Brothers file for bankruptcy protection.