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German morale wilts, AIG fears hit shares again

LONDON/TOKYO - A fall in German business confidence followed overnight news that American insurer AIG looks set to make the biggest quarterly loss in corporate history, deepening the gloom on world stock markets.

As U.S. shares tumbled to 12-year lows on Monday, Washington vowed to prop up ailing banks, while sources familiar with the matter said it was discussing taking a bigger stake in shrinking financial giant Citigroup, and injecting more cash into AIG.

As the global financial crisis plumbs new depths, AIG is asking for a third round of government aid and bracing for a fourth-quarter loss of about $60 billion, one of the sources said, more than double its $24.5 billion third-quarter loss.

American International Group said in a statement it had not yet reported results and would provide an update when it does so in the near future.

News that the key Ifo index of German business sentiment unexpectedly slipped in February dashed January's optimism that the economy had reached the bottom.

"Hopes that the battered economy might be about to turn around took another backlash today," said Carsten Brzeksi, economist at ING Financial Markets.

The consensus forecast had been for no change in the Ifo business climate index, but it fell to 82.6 in February from 83.0 in January. The expectations index rose slightly to 80.9 from 79.5, still looking for a glimmer of light ahead.

News of a hefty 5.2 percent fall in euro zone industrial orders in December also soured sentiment, as did official figures showing business investment in Britain fell by its biggest amount since 1991.

Bank of England Monetary Policy Committee member Andrew Sentance said in a speech on Tuesday that more was needed to prop up the British economy.

"There is a strong case for providing additional stimulus to the economy to head it off more decisively, as well as helping to limit the potential long-term damage to the UK's supply capacity from a prolonged and deep recession," he said.

Stocks in the Stocks

European shares took another beating on Tuesday, with Germany's DAX down 1.8 percent in midday trading. That followed a 1.5 percent tumble on Tokyo's Nikkei index, led down by Japan's largest brokerage, Nomura Holdings.

The Nikkei mostly shrugged off a comment from Japan's finance minister that the goverment was studying measures to support the stock market, just as the Nikkei touched 7,155 -- not far from the 26-year low below 7,000 struck in October.

Government bonds rose, pushing yields lower, and the dollar gained against a basket of currencies as investors sought safety. Fears about retreating demand weighed on oil prices, which fell 1 percent to near $38 a barrel, while the price of gold was mostly steady just below $1,000 an ounce.

U.S. stock index futures, which were up more than 1 percent earlier, cut their gains to less than half a percent.

The United States goverment vowed on Monday to spend more money to prop up ailing banks if needed, even as President Barack Obama pledged to cut the ballooning U.S. budget deficit in half in the next four years.

Obama, who is rolling out his first budget on Thursday, stressed the need to act quickly, emphasising he inherited a $1.3 trillion deficit, with interest payments in 2008 alone costing three times the amount spent on education.

Amid speculation that the U.S. may still have to nationalise some banks, the government said it would start examining large firms' capital needs on Wednesday to determine whether a bigger buffer is warranted.

Citigroup, whose stock has been pounded by fears the government may seize the bank and wipe out shareholders' investments, was in talks to give the government a larger stake, a person familiar with the matter told Reuters.

The idea under consideration would involve converting a big chunk of the $45 billion in preferred shares the government bought last year into common stock, putting as much as 40 percent of Citigroup into public hands.

In Europe, the French government said on Monday it was pumping extra cash into two mutually owned banks, and central banks in central Europe took the unprecedented step of talking up the region's currencies.