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Japan’s exports to Asia fell in October for the first time since 2002, showing that the fallout from the credit crisis has spread to neighbors such as China and adding momentum to investors’ flight to the safety of cash.

Capital flight from emerging markets drove the currencies of South Korea and Indonesia to their lowest levels since the Asian financial crisis a decade ago. India’s rupee hit a record low.

Asian markets suffered the same battering that drove U.S. and European stocks to their lowest levels in 5- years on Wednesday. Japan’s Nikkei tumbled 6.9 percent, while the MSCI All-Country World Index hit its lowest level since May 2003, dragged down by Asian shares.

Shipments to Asia had previously cushioned the impact on Japanese exports of weakening demand from the United States and Europe. But data on Thursday showed they fell 4 percent in October from a year earlier.

The drop in Japanese exports contributed to mounting signs elsewhere that the global slowdown could get worse.

The Federal Reserve forecast that the U.S. economy would contract through the first half of next year and signaled it was ready to cut interest rates further, while U.S. consumer prices last month posted their biggest drop on record.

“The fall in exports to Asia reflects that their economies are also taking a blow from weakness in developed economies,” said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.

Hopes that Asian economies, particularly China, could help prop up global growth have begun to fade as weaker demand in the United States and Europe has quickly translated into slowing factory output and job cuts cash in 1 hour.

Underlining the extent of Beijing’s concerns over its own slowdown, Minister of Human Resources and Social Security Yin Weimin said on Thursday that stabilizing employment is now the government’s top priority.

The worrisome outlook sent bonds surging. The yield on Japanese 10-year government bond futures fell to as low as 1.430 percent on Thursday, the lowest since early October, while the U.S. Treasury two-year yield hit a record low at one point.

Financial bookmakers expect worries over a lengthy economic downturn to send the leading European benchmark indexes as much as 2.4 percent in early trade on Thursday.

CHIP MAKERS HIT

Corporate news helped fuel the rush to safe havens.

Citigroup Inc shares tumbled 23 percent on Wednesday to a 13-year low, as investors questioned the survival prospects of the U.S. banking giant on concerns about mounting losses from credit cards, mortgages and toxic debt.

Friedman Billings Ramsey analyst Paul Miller said in a research note that the U.S. financial system still needs at least $1 trillion to $1.2 trillion of tangible common equity to firm up banks’ balance sheets and improve liquidity in credit markets. 

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Stocks slumped Friday, with investors abandoning a recovery attempt, as the worst retail sales on record ignited fears of a long recession.

The Dow Jones industrial average (INDU) fell 338 points, or 3.8%. Earlier, the blue-chip indicator had lost as much as 363 points and gained as much as 88 points.

The Standard & Poor’s 500 (SPX) index skidded 4.1% and the Nasdaq composite (COMP) shed 5%.

All three major gauges slid on the week as well, with the Dow losing 5%, the S&P down 6.2% and the Nasdaq down 7.9%.

Stocks crumbled through the early afternoon as investors considered the bleak outlook for consumer spending amid the weak retail sales report. Selling pressure eased up in the middle of the afternoon and then returned near the close.

"The recession has been mild up to this point, but I think we’re in for a much uglier one in the fourth quarter," said Scott Anderson, senior economist at Wells Fargo. "The retail sales report demonstrates that."

U.S. sales in October posted the worst monthly decline since the Commerce Department initiated the current measurement standard in 1992.

The corporate news Friday was just as bad. Freddie Mac posted a big quarterly loss. Sun Microsystems announced massive job cuts and Citigroup is reportedly getting ready to announce layoffs.

"Fundamentally the economy is very weak," said Robert Brusca, chief economist at FAO Economics. "The Freddie Mac losses are a reminder of that."

Stocks rallied Thursday, with the Dow gaining 552 points, its third-best single-session point gain ever, as the market bounced back from levels not seen since 2003. Some analysts said that the recovery was significant in helping to establish a bear market bottom.

However, after such a rally, stocks were vulnerable to a pullback Friday, particularly after the retail sales report.

Market breadth was negative. On the New York Stock Exchange, losers beat winners by almost four to one on volume of 1.45 billion shares. On the Nasdaq, decliners topped advancers by more than three to one on volume of 2.31 billion shares.

After the close, Fidelity said it was cutting an additional 1,700 jobs in the first quarter of 2009 as part of an ongoing cost-cutting effort. A week ago the company said it was cutting 1,300 jobs

Retail sales: Retail sales fell 2.8% in October versus a revised 1.3% drop in September. Sales excluding volatile autos fell 2.2% in October, versus a revised 0.5% drop in September. Both results were worse than expected, according to a survey of economists by Briefing.com. (Full story)

"Sales were pretty awful across the board," Anderson said, noting that sales plunged pretty much everywhere other than at grocery stores and on health care. "With consumers only spending on the essentials, that’s pretty dire."

Also on Friday, retailers J.C. Penney (JCP, Fortune 500) and Abercrombie & Fitch (ANF) both reported lower quarterly earnings and issued bleak forecasts for the critical fourth quarter.

A separate report showed a slight improvement in consumer sentiment, according to the latest survey from the University of Michigan. Sentiment rose to 57.9 in November from 57.6 in late October, versus forecasts for a decline to 57.

Investors were also gearing up for the Group of 20 meeting in Washington, which gathers leaders from around the world to address the global financial crisis. It kicks off with a White House dinner Friday. (Full story)

The European economy is officially in a recession, EU leaders said Friday. Germany has already said it is in a recession. Hong Kong is in a recession. And many economists think the U.S. is in a recession, despite a lack of official declaration creditscore.

Recession is generally defined as two consecutive quarters of shrinking economic growth. In the U.S. a recession is officially declared by the National Bureau of Economic Research.

Speaking early Friday, Federal Reserve Chairman Ben Bernanke said that financial markets remain under severe strain. He pledged to continue working with central banks around the world and seemed to indicate the U.S. federal reserve could cut interest rates again at the December meeting. (full story)

Company news: Troubled mortgage giant Freddie Mac (FRE, Fortune 500) reported a steep $25 billion quarterly loss and said it will start chipping away at the $100 billion in taxpayer funds set aside for its bailout. (Full story)

Sun Microsystems (JAVA, Fortune 500) said Friday it will cut up to 6,000 jobs, or 18% of its workforce, as a cost-cutting measure. The software and computer networking company also said it was restructuring its software business operations.

Citigroup (C, Fortune 500) is reportedly getting ready to lay off another 10,000 people on top of the 23,000 it has already let go, according to a Wall Street Journal story Friday. The company is also expected to boost credit card rates, the report said.

Nokia (NOK) said fourth-quarter sales for the broad mobile handset industry will decline. The phone maker said worse credit conditions and the weak economy were to blame.

Hartford Financial Group (HIG, Fortune 500), the troubled insurer, said it has purchased a small bank, making it eligible to receive up to $3.4 billion in funds from the government’s bailout plan.

Investors again pulled money out of equity mutual funds last week, following the first week in months in which investors added money to funds.

In the week ended Nov. 12, investors pulled roughly $31.8 billion out of equity mutual funds, according to tracking firm Trim Tabs. In the previous week, investors added roughly $2.2 billion to funds. However, that one week was an anomaly, with investors cashing out of funds in 15 of the last 16 weeks amid the stock market selloff.

Other markets: Asian and European markets rallied in response to the U.S. advance Thursday.

The dollar gained against the euro, but fell versus the yen.

COMEX gold for December delivery rallied $42.50 to settle at $742.50 an ounce.

U.S. light crude oil for December delivery fell $1.20 to settle at $57.04 a barrel on the New York Mercantile Exchange.

Gasoline prices dipped another 2.6 cents to a national average of $2.152 a gallon, according to a survey of credit-card activity released Friday by motorist group AAA. The decline marks the 58th consecutive day that prices have decreased. During that time, prices dropped by $1.70 a gallon, or 44.2%.

Lending rates: The cost of borrowing rose modestly Friday, but remained near recently improved levels.

The 3-month Libor rose to 2.24% from 2.15% Thursday, according to Bloomberg.com. Overnight Libor rose to 0.56% from 0.4% Thursday, and up modestly from an all-time low of 0.32% last week. Libor is a key interbank lending rate.

The yield on the 3-month Treasury bill, seen as the safest place to put money in the short term, fell to 0.11% from 0.19% Thursday, with investors preferring to take a small return on their money than risk the stock market. In September, the 3-month yield reached a 68-year low around 0% as investor panic peaked.

Treasury prices rallied, lowering the yield on the benchmark 10-year note to 3.72% from 3.86% Thursday. Treasury prices and yields move in opposite directions. 

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After easing the financial-market panic by committing trillions of dollars to shore up their banking systems, governments are broadening their focus to buffering its economic aftershocks.

U.S. lawmakers are moving toward the second fiscal stimulus bill this year and Japanese Prime Minister Taro Aso is set to cut income taxes. In Europe, Britain's Gordon Brown plans to spend more on schools, Italy's Silvio Berlusconi looks to enact tax breaks for manufacturers and Angela Merkel of Germany mulls tax rebates. French Prime Minister Nicolas Sarkozy today lifted a tax on business investment until the start of 2010

“Having taken action on the banking system, we must take action on the global recession,'' Prime Minister Brown told U.K. lawmakers yesterday. “No country can insulate itself.''

Politicians are acknowledging the worst still lies ahead for their economies and their own electoral fortunes unless they act to cushion growth. World leaders will meet in the U.S. on Nov. 15 to review progress in combating the financial crisis and how to avoid a repeat of it.

The cost of borrowing money among banks has fallen after authorities in the U.S. and Europe acted to take stakes in their biggest banks as global stocks plunged and lending seized up. The euro interbank offered rate, or Euribor, that banks charge each other for three-month loans fell 2 basis points to 4.92 percent today, the lowest level since June 5, according to the European Banking Federation.

`Meltdown' Averted

“A global meltdown has been averted and governments, while implementing their respective rescue plans, should now turn their attention to the economy and limit the effects of a global recession,'' said Geoffrey Yu, a London-based currency strategist at UBS AG.

Tensions are easing too late to prevent companies and consumers from retrenching. Economists at Deutsche Bank AG expect the Group of Seven economies to contract 1.1 percent next year, the worst since the Great Depression. Even with emerging markets lending support, they predict the weakest global growth since the 1980s.

“As growth slumps, fiscal policy should turn sharply expansionary,'' said Thomas Mayer, Deutsche Bank's co-chief economist in London.

U.S. lawmakers are devising new spending plans after Federal Reserve Chairman Ben S. Bernanke endorsed the idea on Oct. 20 and the Bush administration dropped its opposition. The new push will aim to extend jobless benefits, fund infrastructure projects and help cash-strapped regional governments, according to House Budget Committee Chairman John Spratt.

Fading Fillip

The effect of measures totaling $168 billion that U.S. lawmakers passed in February has faded after they gave the economy a fillip in the second quarter.

Aso, with an election nearing, will next week unveil the government's second stimulus program since August. The plan will probably include income-tax cuts, deductions for people with home loans and an extension of breaks on capital gains, say economists.

European governments may bend their own rules that cap budget deficits in a bid to save their economies.

Brown's U cash advance in one hour.K. government will next month step up spending on housing, energy and small businesses, while bringing forward construction projects on schools and hospitals, say ministers including U.K. Chancellor of the Exchequer Alistair Darling.

German Budget Balance

Italian Prime Minister Berlusconi's government is indicating it will enact tax breaks for carmakers and appliance manufacturers. German Chancellor Merkel, who had focused on returning her budget to balance, is considering a 15 billion- euro ($19.3 billion) package of tax rebates. Sarkozy said from today “any new investment made by companies'' in France will be tax-free.

Emerging markets, the growth engines of the global economy, are also looking for remedies to fading expansions.

China's State Council on Oct. 21 cut taxes for exporters and approved construction programs including new expressways and hydro-electric power stations. Thailand's Deputy Prime Minister Olarn Chaipravat and Jun Kwang Woo, chairman of South Korea's Financial Services Committee, said in separate interviews on Oct. 21 that their governments may ease fiscal policy.

Governments may prove more powerful than central bankers in the current environment, said Julian Jessop, chief international economist at Capital Economics Ltd. Lower interest rates are less effective when the financial system is frozen and have a lagging effect at the best of times, he said.

Fewer Obstacles

Governments also have fewer obstacles than usual, Jessop said. Public borrowing is unlikely to “crowd out'' other spending given that consumers and companies are cutting back, while the inflationary byproduct of budget deficits will offset deflationary forces such as cheaper fuel and rising unemployment, he said.

“The greater use of discretionary fiscal policy will be an increasingly important global theme over the coming year,'' said Jessop, a former U.K. Treasury economist.

There are some barriers to how far governments can go, and in the longer term investors may punish those running the largest budget deficits, said Robert Lind, chief economist at ABN Amro NV. He calculates that among rich countries Finland, Sweden, Luxembourg and New Zealand have the greatest capacity to spend, while the U.S., U.K. and Japan have the least.

Biggest Post-War Deficit

The U.K. this week posted its biggest six-month budget deficit since World War II, while the annual deficit in the U.S. could exceed $1 trillion for the first time. In contrast, economies which have enjoyed commodity booms such as Australia or China have budget surpluses and currency reserves to tap.

For now, Lind said governments are rightly invoking the spirit of economist John Maynard Keynes, who died in 1946 after a career advocating activist government as the best solution to slumps such as the Great Depression.

“More government intervention should help to contain the severity of the economic downturn,'' said Lind. “We are all Keynesians now.''

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The New York Federal Reserve is lending up to $37.8 billion to American International Group to give the troubled insurer access to much-needed cash.

In exchange, AIG is giving the New York Fed investment-grade, fixed-income securities that it had previously lent out to other institutions for a fee. Those institutions are now returning these securities and want their money back.

The new program, announced Wednesday, is on top of the $85 billion the federal government agreed to lend to AIG last month to prevent the global company from collapsing. AIG said last Friday it had drawn down $61 billion.

The lending program is a way for AIG to get funding for its businesses, said a New York Fed spokesman. The system is similar to lending facilities the Fed provides to banks, which can also exchange collateral for cash.

The latest announcement does not jeopardize the government’s ability to recoup its loan to AIG, experts said.

"AIG will repay the loan," said Stewart Johnson, portfolio manager at Philo Smith, an investment bank specializing in insurance. "It’s just a matter of how much of themselves they will have to sell."

On Sept. 16, the Federal Reserve Board agreed to lend AIG $85 billion, using the company’s assets as collateral. The loan is expected to be repaid from the proceeds of the asset sales. Interest on the line of credit is steep, and the government took a 79.9% stake in the company.

Last week, AIG said it planned to hold onto its property-and-casualty insurance businesses, while selling off the rest of the company to pay the massive debt quick faxless payday loan.

Those other business lines include its aircraft leasing unit; asset-management division; retirement services; and U.S. life insurance operations.

AIG chief executive Edward Liddy, who was installed by the Federal Reserve last month after the bailout, on a conference call last Friday was optimistic about the potential for the asset sales.

"We fully expect to emerge from this with a capital structure that’s fit to fight," he said. "Our insurance businesses…are strong and well-capitalized."

But some analysts are more skeptical. "The current disruption in the credit markets could make it difficult to sell businesses at attractive valuations," ratings agency Standard and Poor’s said.

CreditSights valued the units AIG planned to sell at $32.9 billion and the divisions it will keep at $86 billion. These figures do not include the sale of a minority stake in its foreign life insurance operations, valued at $133.1 billion.

First to hit the market will likely be units tied to airline leasing and consumer lending, both of which require funding from the debt markets, which is hard to come by these days. International Lease Finance Corp. could command more than $7 billion and American General Finance Corp. will likely bring in about $2 billion, according to CreditSights.

Once AIG sells its assets, it faces many hurdles in stabilizing its property and casualty insurance divisions, experts said.  

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Capitol Hill negotiators spent Friday working on details of a $700 billion financial rescue plan while President Bush and leading lawmakers offered assurances that Congress and the administration would get a deal done.

"I believe great progress is being made. We won’t leave until we have legislation signed by the president," said House Speaker Nancy Pelosi, D-Calif., told reporters late Friday afternoon.

President Bush, a few minutes after the U.S. stock markets opened on Friday, said he was certain a bill would get finished. "The legislative process isn’t pretty, but we are going to get a rescue package passed," he said.

Bush summoned lawmakers and the presidential candidates to the White House on Thursday to rally consensus behind his plan. Instead, the meeting revealed a deep split between Democrats and House Republicans. Late-night talks between lawmakers and Treasury Secretary Henry Paulson failed to result in an agreement.

On Friday morning, Republican presidential nominee John McCain, R-Ariz., was in talks with House and Senate Republican leaders to see if an agreement could be reached. Some in the GOP were pushing a hybrid plan that contained elements from the administration’s proposal to buy toxic assets from banks and principles laid out by House Republicans.

House Republicans say they want Wall Street to pay for its mistakes in a "workout" - not a bailout by taxpayers.

Meanwhile, Senate Democratic leaders were angry that the debate had gotten entangled by presidential politics. They said they had come close to working out an agreement with House Democrats, Senate Republicans and one leading House Republican, Spencer Bachus, R-Ala.

"It’s fair to say we’re making progress," said Senate Majority Leader Harry Reid, D-Nev., on Friday morning. "The time is now for House Republicans to come to the negotiating table and for presidential politics to leave the negotiating table. Insertion of presidential politics has … been harmful."

Late Friday morning, House minority leader Rep. John Boehner, R-Ohio said he was sending a House Republican to the bipartisan discussions on the Hill.

House and Senate leaders say they want the bill to gain bipartisan support because it represents such a big policy effort for the U.S. government. They also lack the necessary votes to pass it without Republicans on board, Pelosi said. Some members still object to the fact that the bill lacks provisions that would allow the government to recover the rescue’s costs or allow bankruptcy judges to modify the primary residence mortgages of filers, she explained.

Late Friday afternoon, House Financial Services Chairman Barney Frank, D-Mass., told reporters that the staffs of both parties from the House and Senate were negotiating the legislation.

The core of the bill, he said, was the proposal put forth by Paulson that would allow the Treasury to buy up to $700 billion in troubled mortgage assets from financial institutions to free them up to start lending again.

House Republicans had rejected that core on Thursday, calling instead for the government to insure financial institution’s mortgage-backed securities and for those institutions to fund the insurance through premiums.

Frank said that adding an insurance provision "has been an option payday loan low fee. But there would be no point in participating [in Friday’s negotiations] if you didn’t accept the premise of the Paulson plan."

A call for comment from House Minority Whip Roy Blunt, R-Mo., who is representing House Republicans in the negotiations, was not immediately returned.

Many other elements of the legislation were agreed to in principle by negotiators on Friday, Frank said. They include the need for curbs on executive compensation, the need for significant oversight, the right to seek warrants for equity stakes in the companies that sell troubled assets to Uncle Sam, and restrictions on how the $700 billion would be made available to Treasury.

A Democrat close to the negotiations told CNN that while it seems likely the Senate might not vote on any bailout bill ’till Wednesday, a Sunday night vote is still possible. The timing of any House vote is unclear.

This same source says there’s no reason the final deal can’t include language that allows Treasury Secretary Henry Paulson to put some money into an insurance program - as House Republican have proposed.

The Democrat says Congress will not authorize the full $700 billion expenditure at once, instead it will authorized in phases. Other Democratic members say the amount of the initial allotment continues to change.

Staff level negotiations are ongoing and could continue through the night. The principal negotiators will meet again Saturday.

CNN’s Jessica Yellin contributed to this report. 

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The number of out-of-work Americans who signed up for jobless benefits fell for the third week in a row, matching economists’ expectations.

The Department of Labor reported Thursday that initial filings for state jobless benefits decreased by 10,000 to a seasonally adjusted 425,000 in the week ended Aug. 23. That’s the fewest number of filings reported since the week ended July 19.

The four-week seasonally adjusted moving average of new jobless claims fell 6,000 to 440,250 in the past week. Last year at this time, the figure was 324,750. The average is used to smooth out weekly fluctuations.

The Labor Department said that no special factors affected this week’s data, meaning that the rise in the number of claims that were filed after legislation extended unemployment benefits has essentially leveled off.

Adam York, an economic analyst at Wachovia, said Thursday’s report indicates a weak job market that will continue to shed workers.

"I’d be reluctant to say the effects of the change in rules are gone. I think initial claims are higher than what’s comfortable for the U.S. economy," York said. He added that he expects to see more job losses throughout the rest of the year, due to weak growth in construction and the consumer sector.

It was the sixth straight week that filings exceeded 400,000, a benchmark that indicates softness in the job market free credit report online. The number of filings reached a six-year high of 457,000 in the week ended Aug. 2.

The number of people continuing to receive unemployment benefits rose by 33%, or 64,000, to 3.42 million in the week ended Aug. 16 - the most current date for which data is available.

The four-week moving claims average for those continuing to receive unemployment benefits rose by 36,250 to 3.36 million., compared with 2.56 million in the year-earlier period.

The decrease in filings matched economists’ expectations that claims would hit 425,000.

Employers have cut jobs every month so far this year, pushing the net loss to 463,000. Meanwhile, the nation’s unemployment rate jumped to a five-year high of 5.7% last month. 

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Indonesia's central bank may increase interest rates to as much as 9.5 percent and prevent the rupiah from depreciating too fast to slow inflation, Deputy Governor Hartadi Sarwono said.

A benchmark rate that's 2 percentage points above Bank Indonesia's 2009 inflation target is “adequate'' to keep price gains between 6.5 percent and 7.5 percent next year, Sarwono said in an interview in Jakarta today. “We are not stopping'' after raising the key rate to 9 percent this week, he added.

Higher borrowing costs may attract investors to Indonesian assets and help prevent a rapid depreciation in the rupiah as prices of the nation's commodity exports decline. A sudden weakening of the currency could prompt manufacturers to pass on the higher cost of imported raw materials, stoking inflation that reached a 22-month high of 11.9 percent in July.

“I would choose the word patient to describe them,'' said David Cohen, director of Asian Forecasting at Action Economics in Singapore. “If inflation remains above 11 percent through year-end, they will have to continue raising the policy rate to at least 9.5 percent.''

Bank Indonesia on Aug. 5 raised its benchmark rate for a fourth straight meeting, increasing borrowing costs by a quarter point from 8.75 percent. Inflation may accelerate further before the world's most populous Muslim nation celebrates Id-ul-Fitr, which marks the end of the holy fasting month of Ramadan.

Fasting Month

“The Muslim festival of Id-ul-Fitr in October will add to inflationary pressures, so Bank Indonesia needs to raise rates again,'' said Destry Damayanti, chief economist at PT Mandiri Sekuritas in Jakarta. “A policy rate at 9.5 percent is the correct assessment.''

The central bank will also ensure Indonesia's currency doesn't appreciate past 9,000 to the dollar on average this year, Sarwono said. The rupiah, the third-best performing among Asia's 10 most-traded currencies outside Japan in the past three months, has averaged 9,239 per dollar in 2008 paydayloans.

The rupiah fell 0.8 percent to 9,170 against the U.S. currency at 5:33 p.m. in Jakarta, the biggest drop in five months. Bank Indonesia will buy or sell the currency to keep the exchange rate stable, the central banker said.

“Intervention is still important,'' Sarwono said. “We see the demand from Pertamina is very high. It's not fair for the central bank to let the market fulfill that demand because a big part of oil and gas revenue is placed with the central bank.''

Buying Dollars

PT Pertamina, Indonesia's state oil company, needs to buy U.S. currency to import oil products as its refineries don't produce enough fuel to meet local demand. The company imported an estimated 12.1 million barrels of oil products in June.

Wholesale-price inflation accelerated to 34.7 percent in June, the fastest pace in nine years. About 70 percent of the raw materials used by manufacturers in Indonesia are imported.

Should manufacturers perceive the rupiah weakening to 9,400 against the dollar “it could trigger them to pass on the cost'' to consumers, Sarwono said. “A big part of production costs comes from imported inflation.''

Indonesia's economic growth probably slowed to 6 percent in the second quarter, from 6.3 percent in the previous three months, the central bank said in a quarterly publication dated Aug. 5 that was released today.

“Aggregate demand and loan growth may already be facing headwinds ahead,'' said Helmi Arman, an economist with PT Bank Danamon Indonesia in Jakarta. Bank Indonesia must be careful not to overdo rate increases, he said.

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Venezuelan President Hugo Chavez is set to tighten his government's grip on the economy by taking over his first bank, the local unit of Spain's Banco Santander SA.

Plans to nationalize the country's third-largest bank, announced yesterday, will give the state access to Banco de Venezuela SA Grupo Universal's 285 offices and $9.46 billion in deposits. It follows nationalizations in the oil, steel, cement, electricity and telecommunications industries.

Chavez is using a surge in oil revenue to increase his control of the economy and move the South American country closer to his goal of “21st-century socialism,'' even as government takeovers scare off investors. The economy expanded at its slowest pace in more than four years in the first quarter as private investment contracted.

“With this price of oil, the government has the capacity to buy, and it seems they're upsizing to control new sectors of everyday life,'' said Alejandro Grisanti, an economist at Barclays Capital Inc. in New York.

Chavez said he will pay fair compensation for Banco de Venezuela, which Santander bought from the government in 1996. He said he has been in touch with the bank's local president, and that he is interested in seeking a “friendly agreement.''

“I want to get it back because it's the bank of Venezuela — that's its name,'' Chavez said yesterday in comments on state television. “We'll put it at the service of Venezuela, because the bank was very profitable.''

Politically, the takeover may be less popular than Chavez's other nationalizations, said Miguel Carpio an economist at Banco Federal CA in Caracas. Quickening inflation and rising crime have hurt the president's approval rating since he was re- elected in 2006. In December voters handed Chavez his first electoral defeat when they rejected his plan to rewrite the constitution.

“The government's taking over a company where people keep there money, so it's more delicate,'' Carpio said. “Certainly there's going to be doubts about the state's capacity to manage a big financial entity.''

Economists forecast the government will have to pay $1.2 billion to $1.9 billion to take control of the local Santander unit.

Negotiations

“I don't think the government is going to be irrational here,'' Carpio said.

Last year, Venezuela paid $1.32 billion to take over the country's biggest telephone company and $739 million to buy the main electricity company from Arlington, Virginia-based AES Corp.

Chavez is still in negotiations with Luxembourg-based Ternium SA over compensation for its stake in the country's biggest steelmaker, and has yet to announce agreements with cement companies Cemex SAB of Mexico, France's Lafarge SA, and Switzerland's Holcim Ltd payday loans application.

Venezuela, the biggest oil exporter in the Western Hemisphere, is benefiting from a more than 60 percent increase in crude prices on international markets during the past 12 months. Venezuela is the fourth-biggest oil supplier to the U.S.

A spokesman for Banco Santander in Spain and a spokeswoman at the bank's Caracas office declined to comment when contacted by telephone.

Profit Contribution

Banco de Venezuela, founded in 1890, was nationalized in 1994 and then sold to Banco Santander two years later. The Spanish bank paid $351.5 million for a 93.4 percent stake at the time, according to its Web site.

The Venezuelan bank contributed 109 million euros ($170 million) to its parent company's income in the first half of 2008, 2 percent of the Santander, Spain-based bank's profit.

Chavez said he decided to nationalize the bank after blocking Santander's bid to sell the subsidiary to private investors in Venezuela.

Banco de Venezuela holds 11.8 percent of all outstanding loans in the South American country and 10.7 percent of deposits, according to Banco Santander's first-half earnings report. The Venezuelan unit has 3 million clients nationwide.

Banesco Banco Universal is the largest bank in Venezuela, with a 14.2 percent share of deposits. Banco Mercantil is the second largest, with an 11.5 percent market share.

Banking Industry

The takeover may be a blow to the banking sector at a time when Venezuela's economy is slowing, Carpio said. The government may move more of its cash into the public banking sector, resulting in a loss of deposits for private banks.

The financial services sector contracted 6.4 percent in the first quarter, after expanding 29 percent in the same period a year earlier, according to the central bank. Policy makers have raised interest rates twice this year in a bid to cool a consumption boom that's fueled the fastest inflation in Latin America.

“If they nationalize Banco de Venezuela, it will give the government a greater possibility of regulating the rest of the sector,'' said Cesar Aristimuno, an analyst at Caracas-based Aristimuno, Herrera y Asociados.

– With reporting by Charles Penty in Barcelona. Editor: Brendan Walsh, Andrew Barden

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Construction spending fell in May, marking three consecutive months of decline, according to a government report released Tuesday.

The 0.4% decline, to a seasonally adjusted annual rate to $1.085 trillion, was better than the 0.6% drop forecast by a consensus of economists surveyed by Briefing.com.

That doesn’t mean builders are out of the woods. Spending has dropped 6% from May of 2007, and for the first five months of 2008, construction spending topped $416.6 billion, down 5.1% from the same period last year.

Spending on private construction fell in May, declining 0.7% to an annual rate of $784.2 billion.

Private residential construction spending declined for the 27th consecutive month in May, droppping 1.6% to a seasonally adjusted annual rate of $378.9 billion. But private nonresidential spending climbed 0.2% to an annual rate of $405.3 billion.

Private nonresidential construction spending has risen every month since February low fee cash advance. That uptick may be shortlived, according to Mike Larson, an analyst with Weiss Research. He predicts that the downturn in residential spending will likely spill over to the commercial sector as oil prices continue rising and consumer spending gets further squeezed.

"We’re not going to see a giant pullback on the order of residential spending, but we will see spending in commercial construction slow in the months ahead," Larson said.

In May, public construction spending climbed 0.4% to a $301.1 billion annual rate.

The Commerce Department also reported that construction activity fell by a revised 0.1% in April.

The spending figures for residential and nonresidential spending are used by economists to forecast the investment component of quarterly GDP.  

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General Motors announced plans Tuesday to shut four truck and SUV plants that employ thousands of workers. It also said high gas prices are here to stay - and, with them, consumers’ growing preference for more fuel-efficient vehicles.

At a news conference in Wilmington, Del., GM Chairman and CEO Rick Wagoner announced plans to roll out more fuel-efficient vehicles, including approval to start the production process on a vehicle that can run gas-free for trips up to 40 miles.

But the plant-closing plans are a stunning admission from the nation’s largest automaker that its long dependence on large SUVs and pickups is no longer a viable strategy for a company struggling to end losses from its North American operations.

The plants to be closed include two U.S. facilities: The Moraine, Ohio plant that builds midsize SUVs, such as the Chevrolet Trailblazer and GMC Envoy; and the Janesville, Wisc., assembly line that builds large SUVs such as the Chevy Tahoe and Suburban and GMC Yukon.

In addition, it plans to close a pickup plant in Oshawa, Canada, and a truck plant in Toluca, Mexico.

The Mexican plant that builds medium-duty trucks sold to businesses rather than consumers will close later this year. The other plants will close in 2009 and 2010, with sooner closings possible if sales do not improve. Each U.S. plant has about 2,500 employees.

The company said it believes that high oil and gasoline prices will be the norm, and that prices are likely to go higher due to strong global demand for oil.

"These higher gasoline prices are changing consumer behavior and rapidly," said Wagoner. "We don’t think this is a temporary spike or shift. We think it is permanent."

Goodbye Hummer Wagoner also said GM is looking at possibly selling its Hummer unit as part of a strategic review of the SUV brand based on military vehicles. The Hummer H3 mid-size SUV gets about 13 to 14 miles per gallon in city driving in the most recent EPA ratings pay day loans. The H1 and H2 are larger vehicles on which EPA does not give mileage estimates.

The brand has become the symbol to many members of the public of a gas-guzzling large U.S. vehicle.

Hello Volt He also announced that GM has approved production of the Chevrolet Volt, a so-called plug-in hybrid vehicle that can run about 40 miles without any use of gasoline. The Volt will be built in GM’s Hamtramck, Mich., plant and is due in showrooms by the end of 2010.

"We believe it’s the biggest step yet in our industry’s move away from its historic, nearly complete reliance upon petroleum to power vehicles," he said. "We believe the Volt is an important investment for the future of our company and our shareholders."

Ahead of the rollout of that new model, GM plans to increase production of some more fuel-efficient car models. It’s adding a third shift at its Orion, Mich., plant to build more of the Chevy Malibu and Pontiac G6 models, as well as a third shift at a Lordstown, Ohio, plant that builds the compact Chevrolet Cobalt and Pontiac G5 models.

It also plans a more fuel-efficient gasoline engine for its small car models that will get about 9 miles per gallon more than current GM engines in the segment.

The plans were announced ahead of GM’s (GM, Fortune 500) annual meeting Tuesday in Wilmington. They followed similar plans unveiled last month by rival Ford Motor (F, Fortune 500), although Ford did not give details of plant closing plans.

About 19,000 U.S. hourly employees had already agreed to take buyout and retirement bonuses to leave the company in recent months, but it had originally planned to replace most of those workers with lower-wage new hires who were not due the same expensive benefit package. 

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