U.S. consumers slash spending and world markets stabilize

By Claudia Parsons and Christian Plumb

NEW YORK (Reuters) - Americans slashed spending and the country's business outlook weakened but there were signs of stabilization in global markets on Friday, with interbank rates falling and U.S. stocks posting their best week in 34 years.

But in a sign of the hurdles that lie ahead, the Bank of Japan slashed interest rates, banking giant Barclays said it was raising $12 billion (7.5 billion pounds) in capital and a top U.S. lawmaker demanded that banks use money from the country's $700 billion financial bailout package to boost lending.

How to shore up the decimated U.S. housing market, which stands at the root of the global credit crisis, again took centre stage on the last Friday before Americans go to the polls to choose their next president.

A U.S. Commerce Department report showed consumers cut monthly spending for the first time in two years in September, evidently bracing for hard times as jobs continue to disappear and credit conditions tighten.

Another survey showed U.S. consumer confidence in October suffered its steepest monthly drop on record.

"Consumers reported the most dismal assessments of their current financial situation ever recorded," the Reuters/University of Michigan Surveys of Consumers said.

Other reports showed business activity fell in the U.S. Midwest and New York City.

But there was at least one hopeful sign, as the closely watched interbank lending rates fell, suggesting that the moves taken by central banks and others to remove blockages in the credit system were working to some extent.