The UK government will allow banks to insure themselves against losses on their riskiest assets. It will offer guarantees on their debt and set up a 50-billion-pound fund to buy up high-quality securities to get cash flowing freely again.

The government also gave the Bank of England a green light to increase money supply in the economy if it thought it necessary as interest rates, now at 1.5 percent, approach zero.

"It sounds very much like quantitative easing," said Alan Clarke, UK economist at BNP Paribas. "The government is giving the Bank of England an additional policy tool."

The state's stake in Royal Bank of Scotland will rise to 70 percent from 58 percent. RBS said it made a loss of up to 28 billion pounds ($41.3 billion) last year, the biggest loss in British corporate history, including a huge goodwill hit on its purchase of parts of ABN AMRO in 2007.

European stock markets rallied as investors digested the details of the bailout.

In Europe, Germany's DAX rose 72.05 points, or 1.7 percent, at 4,438.33, while France's CAC-40 was up 48.50 points, or 1.6 percent, to 3,065.25.

Most attention was on the FTSE 100 index of leading British shares, which was up 82.82 points, or 2 percent, at 4,229.88, after the British government said it would be creating a scheme to insure bank loans in the hope that the banks will start lending again.

Bank of Japan Governor Masaaki Shirakawa said bad loans worldwide were likely to exceed current estimates.

"The current figure of $1.4 trillion to rise a little more," Shirakawa told a parliamentary committee.

Britain pumped 37 billion pounds into the banks in October but credit remains scarce and finance minister Alistair Darling said fourth-quarter GDP figures out on Friday would confirm the UK is in recession for the first time since 1992.

"There is a way to go yet. Looking out towards the next year, there's no doubt the downturn in economies across the world is really quite sharp now," he said.

Under the latest multibillion UK plan, lenders would identify their riskiest assets which they could then insure with the government for a fee. They would still be liable for initial losses but could at least put in a ceiling, boosting confidence.

The Danish government unveiled a 100 billion crown ($17.8 billion) bank credit package of its own on Sunday to jump-start corporate and private lending, prompting shares in leading Danish banks to trade higher on Monday.

The worst financial crisis in 80 years has already felled top banks. Shares in Britain's Barclays crashed 25 percent on Friday as speculation hit fever pitch.

Yesterday, Barclays said it knew of no justification for that fall and said it expected to report annual pre-tax profit well in excess of the 5.3 billion pounds consensus estimate.

Its shares leapt 7 percent in response, while Europe's top share index climbed 1.1 percent. But RBS shares plunged 20 percent on the back of its colossal loss.

"If recent history is a guide, any market euphoria related to such a bailout package generally evaporates on the realisation that such mammoth support was required in the first instance," said Daragh Maher, Deputy Head of Global FX Strategy at Calyon.

Obama poised

The incoming US administration is also poised to act, saying it will make its bailout funds work harder to get credit flowing again to cash-starved consumers and companies.

In Washington, a senior advisor to Barack Obama, who will be sworn in as president today, said the new team would soon change the way the second half of the $700 billion bank rescue scheme was run to make it more effective.

"We want to see credit flowing again. We don't want them to sit on any money that they get from taxpayers," Obama adviser David Axelrod said.

One option under discussion is a government-run "aggregator bank" that would absorb toxic debt weighing down banks' balance sheets. Obama is also working with lawmakers to launch an $825 billion fiscal stimulus plan by mid-February.

The US economy has already been declared in recession. Data this week will do little to dispel the gloom.

One forecasting group said Britain's economy was set to shrink 2.7 percent this year, the biggest annual contraction since the end of World War II.

Japan is expected to report on Thursday a record 30 percent drop in exports and its central bank is set to forecast that the world's second-biggest economy will contract for the full two years to March 2010 and will soon return to deflation.

International Monetary Fund chief Dominique Strauss-Kahn said more countries may soon need IMF bailout packages.

"I'm afraid that some other countries, not only in eastern Europe, but all around the world (may need help)," he said when asked if he believed other countries, particularly in Europe, would have to seek IMF bailouts.

The financial crisis also claimed political scalps with top South Korean economic ministers getting the sack.