Finance chiefs from the world's three biggest economies sought on Tuesday to keep a lid on global market jitters as banks at the sharp end of a global financial storm said they faced serious trouble.

Japanese Finance Minister Koji Omi and U.S. Treasury Secretary Henry Paulson agreed to keep a close eye on markets while German Finance Minister Peer Steinbrueck said there was no sign of the turmoil hitting the wider economy.

But the Chief Executive of Germany's WestLB bank, Alexander Stuhlmann, said a meltdown in the U.S. subprime mortgage market was making it difficult for German banks to get credit lines from their foreign partners.

Stuhlmann told reporters that German banks were in a not uncritical situation overall. WestLB has said it has over 1.2 billion euros in overall exposure to the U.S. subprime sector.

His assessment followed an announcement from Capital One Financial Corp that it will cut 1,900 jobs and shut down a wholesale mortgage unit it acquired less than a year ago, as it struggles with the U.S. housing downturn.

Omi told a news conference there were no plans for an emergency meeting of the Group of Seven industrialised nations following sharp gyrations in global markets.

But he said he had spoken by telephone with Paulson and they had agreed to keep a close watch on markets and stay in close contact. (For full report double click on)

I could tell he has been making various efforts, Omi said of Paulson, though he did not give specific details. We agreed that we will watch markets developments carefully for a while.

Steinbrueck insisted the real economy was sustaining little damage, an assertion consistently put forward by policymakers so far. I have no reason to doubt that we can effectively manage the effects of the U.S. mortgage crisis in Europe, he said.

But investors remained ultra-cautious, fearing more credit problems will come to light, which could slow the world economy.

There is still a sense of caution in the air, said Irvin Seah, an economist at DBS Bank in Singapore. If there is more bad news, what we saw last week is probably going to repeat itself. Most people think it will take another two months before things calm down.


U.S. policymakers will hold centre-stage on Tuesday -- Paulson, Federal Reserve Chairman Ben Bernanke and Senate Banking Committee Chairman Chris Dodd are due to meet later to discuss conditions in financial markets.

The closed-door meeting is to take place at 1400 GMT and Dodd is due to hold a news conference afterwards.

Speculation is feverish that the Federal Reserve may cut the federal funds rate, its key policy rate, from 5.25 percent, at its September 18 meeting or even earlier.

On Friday, it cut the discount rate that governs Fed loans to banks by half a percentage point to 5.75 percent, a move which helped bloodied stock markets claw back lost ground.

French Prime Minister Francois Fillon said the Fed and the European Central Bank had dealt well with market tremors so far. He said more financial market turbulence was possible but was upbeat about the outlook for French growth.

Central banks remained watchful.

The Bank of England said it lent 314 million pounds ($624.1 million) through its standing facility in the previous session, the first time it has been tapped in more than a month.

Australia's central bank again pumped sizeable amounts of cash into its banking system to ease liquidity problems.

Stock markets continued to trade with uncertainty, which a surprise Chinese interest rate rise did nothing to resolve.

European shares slid, ending a two-session rally, with banking stocks leading the way down, and U.S. index futures pointed to a weaker start on Wall Street.

But Asian stocks extended gains. The Nikkei share average rose 1.1 percent and has now climbed 4.1 percent in two sessions, after plunging 9 percent last week.

The three-month U.S. T-bill yield, which fell 126 basis points at one stage on Monday for its biggest one-day drop since the stock market crash of 1987, slipped further.

Investors with risky assets in their portfolios are now rushing to liquidate positions and limit their losses, said Kosuke Hanao, head of forex sales at HSBC in Tokyo.

(Reporting by Matthias Inverardi and Iain Rogers in Berlin, Swaha Pattanaik in Paris, Jeffrey Hodgson in Hong Kong, Jan Dahinten in Singapore and Yoko Nishikawa in Tokyo)