WASHINGTON/BERLIN/TOKYO, US/GERMANY/JAPAN - CENTRAL banks pumped emergency funds into world financial markets for a second day on Tuesday in an increasingly fraught effort to contain the fallout from the crisis sweeping Wall Street's biggest firms.

The US Federal Reserve left interest rates on hold at 2 per cent, preferring instead to soothe rattled financial markets by joining with fellow institutions around the world to flood money markets with liquidity to stop them freezing.

The concerted global injections of hundreds of billions of dollars failed, however, to prevent a surge in the cost of borrowing between banks - in some cases on a scale unseen even when the global credit crunch hit in August 2007.

'The bottom line is 'Watch what they do, not what they say.' They pumped the market up with a US$140 billion (S$201 billion) liquidity injection (through overnight repos Monday and Tuesday), and if I had to choose between that and a 50-basis-point cut today, which is more symbolic - I'd choose the US$140 billion,' said Mr James Caron, co-head of global rates research at Morgan Stanley.

'The Fed is doing what they need to do, they are pumping the market with more liquidity, and that is the right thing.'

Investors worldwide are fretting over events on Wall Street, where Lehman Brothers, once thought too big to fail, filed for bankruptcy protection on Monday, and where another giant, insurer AIG, is seeking survival help.

'It's clear that this financial market crisis is the worst worldwide in decades - and it is not over,' Germany's finance minister, Peer Steinbrueck, told parliament.

The Federal Reserve pumped US$70 billion of temporary reserves into the banking system on Tuesday, following the US$70 billion it provided on Monday, and said it was ready to do more as needed.

The European Central Bank injected 70 billion euros (S$142 billion) into money markets on Tuesday, after 30 billion the previous day. Demand from banks for Tuesday's funds, a measure of how much other sources of liquidity are drying up, topped 100 billion euros.

In Britain, the Bank of England injected 20 billion pounds (S$51 billion), after 5 billion on Monday. Demand was three times the amount of extra liquidity offered Tuesday.

Wheels slowing

The cost of borrowing dollars overnight, as revealed by the LIBOR (London interbank offered rate) fixing, more than doubled to 6.43750 per cent from 3.10625 on Monday, its highest since January 2001, the latest fixing by the British Banker's Association Tuesday showed.

'This is much worse than August last year,' said one market source, referring to the day the credit crunch snowballed out of the United States, forcing central banks to launch emergency liquidity operations.

Asian central banks also rolled into action, with those of Japan, Australia and India flooding money markets with cash.

The region's banks doled out US$17 billion, following Monday's US$70 billion Federal Reserve injection.

The Bank of Japan made its biggest cash injection in almost six months - 1.5 trillion yen (S$20.4 billion) - and the prime minister met top financial policy-makers to discuss events.

The rates at which banks lend to each other jumped in South Korea too, and in the financial hub of Hong Kong, while Asian stock markets, many of them closed for a holiday on Monday, tumbled and currencies whipsawed.

The Bank of Japan is expected to leave its key interest rate unchanged at 0.5 per cent on Wednesday.

Shockwaves from the Wall Street crisis prompted the Reserve Bank of Australia to pump nearly A$1.8 billion (S$2.1 billion) into the banking system in its second injection in two days.

The Reserve Bank of India added almost 60 billion rupees (S$1.8 billion) through a refinance operation, its biggest injection in at least a month.

Hong Kong, South Korea, Taiwan, New Zealand and Indonesia all offered verbal reassurances, as did governments in Europe.

Russia's central bank injected a record US$14 billion on one-day funds while in Norway the central bank allotted US$5 billion in one-week foreign exchange swaps, having earlier in the day suspended a new fixing for daily money market rates due to lack of liquidity..

Paris, Berlin and Rome have all made statements saying banks on their own patches should see only limited damage from events on the other side of the Atlantic.

Germany's Steinbrueck said one risk outside the financial sector was the extent to which banks would stop lending to firms and individuals, hitting the economy more generally.

Mr Eric Woerth, France's budget minister, said he believed the crisis remained primarily one for investors and the financial sector but not retail bank depositors, even if they too could suffer from banks being less willing to lend. -- REUTERS