U.S. Fed steps in to stem crisis

By Daniel Trotta and Kevin Krolicki

NEW YORK/WASHINGTON (Reuters) - The U.S. Federal Reserve stepped forward as a commercial lender of last resort and signalled a readiness to cut interest rates as governments around the world scrambled to stem the growing credit crisis and stocks spun lower for a fifth straight day.

Financial shares tumbled, led by Bank of America Corp, a day after the largest U.S. bank said it would sell $10 billion (5.72 billion pounds) in new stock and stoked fears that other banks may also need to raise capital.

The British government was readying a rescue package for the UK banking system likely to include public money injected into the banks. That plan will be announced on Wednesday, just three days after the U.S. government approved a $700 billion bailout fund that has failed to calm markets.

U.S. Federal Reserve Chairman Ben Bernanke said the U.S. economy was being battered by a financial crisis of "historic dimension" and that the risk for inflation has eased with the falling prices for oil and other commodities.

"In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate," said Bernanke, who is regarded as an expert on the Great Depression.

In an unprecedented move, the Fed also created a new commercial paper facility that would buy short-term, highly rated debt, stepping into the corporate debt market in a program that falls outside the $700 billion rescue plan approved by the U.S. Congress on Friday.

Stocks remained under pressure while U.S. government bond prices recovered and gold prices moved higher in a continued flight to safety.

The S&P 500 index shed another 6 percent. That broad measure of the market has now dropped 15 percent since the start of the month. The Dow Jones industrial average has lost over 1,400 points over five sessions, the biggest cumulative point loss over that period on record.