All eyes on G7 as markets take fright

By James Mackenzie and Daniel Trotta

WASHINGTON/NEW YORK (Reuters) - Leaders of the world's leading economies confronted a financial system in shambles on Friday as they gathered in Washington with panic selling in the stock markets, credit frozen solid and the world teetering on recession.

Finance ministers and central bankers from the Group of Seven meet in Washington, searching for answers after joint interest-rate cuts, liquidity injections, a $700 billion (398 billion pound) bailout and government plans to take equity stakes in banks failed to restore investor confidence.

U.S. President George W. Bush was due to speak on the economy at 10:25 a.m. EDT (2:25 p.m. GMT), and French President Nicolas Sarkozy may launch a new European Union plan to try to deal with the crisis, a government official said.

Wall Street appeared to have no bottom. The Dow .DJI and the S&P 500 tumbled more than 7 percent in the first minutes of trade.

That came after the Dow .DJI fell 679 points, or 7.3 percent, on Thursday, extending its losses over six trading sessions to 20 percent.

Underlying the stock market sell-off was the disarray in the credit markets. Rates for three-month interbank dollar loans -- what banks charge each other to borrow -- rose again on Friday. Overnight rates also jumped.

Japan's Nikkei .N225 tumbled 9.6 percent, while in Europe major indexes traded down more than 8 percent.

Bourses in Iceland, Russia, Austria, Indonesia, Romania and Ukraine all closed as a result of the share price falls.