TOKYO (Reuters) - Japan sank deeper into recession with its worst quarterly contraction in 35 years, data showed on Monday, its reliance on exports and soft domestic demand dragging down the world's second-largest economy.

The grim Japanese figures, coupled with disappointment over the lack of coordinated action from the G7 and worries about bank rescue plans pushed European shares down by 0.6 percent in morning trade.

In Rome, G7 financial leaders, fearing a 1930s-style resurgence in protectionism, pledged at the weekend to do all they could to fight recession, but major world economies still faced the biggest downturn in decades.

The outlook for the global and euro area economy in 2009 appears dismal, European Central Bank Governing Council member George Provopoulos said on Monday.

The current crisis is the biggest since the 1930s and exiting from it will not be easy or quick.

India said government spending may have to rise sharply this year to shield the economy from the global credit crunch. The announcement in an interim budget worried investors and credit rating agency Standard and Poors said it planned to review the Asian giant's domestic debt rating.


In Britain, falling demand worldwide forced German car maker BMW to announce it was shedding 850 jobs and cutting back production of the Mini at its factory near Oxford in central England.

Singapore Airlines said it planned to cut capacity by 11 percent in the year from April in the face of waning travel and cargo demand.

The German government is considering emergency measures to rescue the stricken bank Hypo Real Estate, whose shares have fallen by 97 percent over the last 18 months.

In Europe, the Czech Republic approved an economic stimulus package, Hungary announced plans to raise value-added tax to help boost the economy, and Bulgaria said its economic growth nearly halved in the fourth quarter of last year.

With U.S. and Japanese interest rates already close to zero, G7 leaders had to look beyond conventional economic tools once they cannot cut rates any further, with a possible return to Japan's experiment with quantitative easing earlier this decade.

European Central Bank President Jean-Claude Trichet foreshadowed non-standard measures to tackle the crisis, but said the ECB had not drawn any conclusions after discussions with other central banks.

Trichet gave no concrete plans, but it was hoped he would provide more clues with an address at 1445 GMT (9:45 a.m. EST) on Monday.

So-called quantitative easing, in which banks buy assets to raise money supply and boost demand, is now being considered by most of the world's major central banks.

The U.S. Federal Reserve has begun what it calls credit easing and the Bank of England could follow within a month.

The ECB held interest rates at 2 percent this month, but figures last week showing the euro zone economy had shrunk 1.5 percent in the 2008 fourth quarter meant a cut to a record low of 1.5 percent was likely next month.


Even though Japan has been relatively insulated from the collapse of the U.S. credit and housing markets that precipitated the global crisis, Economics Minister Kaoru Yosano said his country faced its worst economic crisis since World War Two.

With demand for its cars and electronics waning, an unprecedented slump in exports saw Japan's economy shrink by 3.3 percent, marking three straight quarters of contraction and its worst result since the first oil crisis in 1974.

Adding to the Japanese government's woes, finance minister Shoichi Nakagawa faced calls for his resignation on Monday after denying he was drunk at a G7 news conference. He said he had taken too much cough medicine.

Japan has suffered a sharper contraction than other major economies because of its heavy dependence on exports combined with persistently soft domestic consumption.

The data showed a severe picture of the Japanese economy and highlighted the weakness in exports, said Takeshi Minami, chief economist at Norinchukin Research Institute.

Japanese investors had largely factored in a big fall in GDP, limiting losses after the data was released.

The Nikkei share average fell 0.4 percent. The yen rose against other major currencies despite the bad GDP data after the G7 financial chiefs made no specific mention of the strength of the Japanese currency.

In the United States, President Barack Obama will on Tuesday sign a $787 billion economic stimulus package which it is hoped will save or create 3.5 million jobs.

Administration officials said Obama would form a task force to oversee the restructuring of the ailing U.S. auto industry.

General Motors Corp and Chrysler LLC are due to submit new turnaround plans by Tuesday showing they can be made viable again after receiving $13.4 billion in emergency aid from the former Bush administration last year.

(Additional reporting by Sumeet Desai in Rome, Elaine Lees in Tokyo, Kevin Krolicki in Detroit, and Reuters bureaux around the world; Writing by Giles Elgood; Editing by Alison Williams)