TOKYO/LONDON - Secretary of State Hillary Clinton called on Tuesday for a coordinated response to revive the global economy, hit by a deepening recession that some countries fear could be worsened by protectionist policies.

President Barack Obama was due to sign a $787 billion stimulus package later on Tuesday, when automakers faced a deadline to present survival plans to outline how it can cut costs and payback the loans.

In Europe, the banking sector, hit by bad loans from a mortgage collapse in the United States and across the West, could face further losses, a ratings agency said.

Moody's said Western European banks had bought most of their eastern European counterparts, now facing higher provisions for bad debt, the rise in banks' borrowing costs and falling currencies.

In Japan, where a Reuters poll showed that confidence among manufacturers had stayed near record lows, Clinton said she had discussed with Foreign Minister Hirofumi Nakasone the economic challenges facing our two countries and the world as a whole, which demand a coordinated global response.

As the first- and second-largest economies in the world, we understand those responsibilities.

Governments have employed a mixture of measures to try to ease a deepening recession. Stimulus packages, interest rate cuts and part-nationalising banks have so far failed to stem the economic downturn, and policymakers have started discussing unconventional alternatives.

European Central Bank governing council member Ewald Nowotny said Europe had some room to cut interest rates but basically I am not an advocate of nominal zero interest rates, which would mean negative real interest rates.

There is, as we are going down with interest rates, the discussion on whether there are additional, more unconventional measures. This is a discussion that is going on in the ECB and we have to see how things develop, he said in an interview with the Financial Times.

Heightened concern about the global economy and corporate profit sent world stocks to a two-week low and the Moody's report, which underlined the fiscal weakness of much of eastern Europe, forced the euro lower.


Asian shares led the way for Europe, with Japan's Nikkei sinking to a near 4-month closing low.

Across Asia, data confirmed the region was firmly in recession.

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

The Reuters Tankan monthly poll provided more evidence of a deepening recession as demand crumbles and companies cut jobs.

Manufacturers' sentiment edged up to minus 74 in February, up two points from the previous month, which had marked the lowest since the survey began in June 1998.

Sentiment among electric machinery and autos/transport equipment sectors -- two of Japan's leading industries -- rose by the same amount, but confidence among non-manufacturers worsened by 8 points to a record low of minus 39.

Japan's finance minister, Shoichi Nakagawa, also said he would resign, after Japan's budget passes, over his embarrassing performance at a G7 weekend meeting in Rome.

Nakagawa's untimely departure is a major blow to increasingly unpopular Prime Minister Taro Aso. Analysts said Aso himself may not last for long.

With Nakagawa quitting, the government lacks a person in charge to come up with further steps to support an economy that is worsening sharply, said NLI Research Institute chief economist Koichi Haji.

Aso appointed 70-year-old Economics Minister Kaoru Yosano to succeed Nakagawa, according to media.

(Additional reporting by Reuters bureaux around the world; Writing by Elizabeth Piper and Paul Tait; Editing by Giles Elgood)