Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke hosted the Group of Seven discussions, where officials embraced a plan that would seek to increase the openness, or transparency, of financial markets and to sharpen regulators' response to urgent financial problems.
Besides the United States, the other members of the G7 are Japan, Germany, Britain, France, Italy and Canada. Friday's action preceded the weekend meetings of the 185-nation International Monetary Fund and the World Bank.
Risks to the United States and the global economy have intensified since finance officials from the Group of Seven countries last gathered here in October. Many economists now believe the United States has fallen into a recession and the odds of a worldwide downturn have risen sharply - to one in four - according to the IMF, a global financial firefighting institution.
Even as the financial officials talked about the best ways to battle future financial emergencies, Wall Street took another plunge. The Dow Jones tumbled more than 250 points.
"The turmoil in global financial markets remains challenging and more protracted than we had anticipated," the G7 officials said.
In the United States, where credit troubles sprang forth with a vengeance last August and quickly spread financial turmoil worldwide, the damage is sorely felt. Foreclosures have surged to record highs, job losses in the first three months of this year have neared the staggering quarter-million mark and financial companies have racked up billions of dollars in losses. The once mighty Bear Stearns, the fifth-largest investment bank in the United States, crashed, prompting a takeover by JP Morgan in a controversial deal backed by the Fed.
Worldwide financial losses could approach $1 trillion over two years, the IMF said earlier this week.
"Given the significant short-term downside risks, we are taking action," Paulson said of the G7's decision to adopt the plan. "There may be more bumps in the road," he warned.
The G7 officials were meeting at a time when the value of the U.S. dollar was hitting record lows against the euro and has fallen sharply against Japan's yen.
"There have been at times sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability," the G7 statement said, in a departure from previous language. The members pledged to closely monitor the situation and "cooperate as appropriate."
The change in the wording on currencies was pushed by European officials whose own manufacturing companies are complaining loudly that the falling dollar is giving American producers a competitive advantage in their markets.
French Finance Minister Christine Lagarde said the "true test" of the change in the currency language would come when currency markets open for trading.
The Financial Stability Forum, a group that includes central bankers and major financial regulators from around the world, developed the plan adopted by the G7. The forum is headed by Mario Draghi, chief of Italy's central bank, who presented his group's findings to the other G7 officials during their closed-door meeting.
The plan is designed to make financial markets less secretive and improve supervision, which in theory would help prevent a repeat of the current financial debacles.
It calls for strengthening oversight to make sure financial companies have sufficient capital, cash and risk-management practices to handle problems. It also would bolster transparency and the valuation of complex investment products, improve the operation of credit-rating agencies, strengthen authorities' responsiveness to risks and put in place arrangements to deal with stress in the financial system.
One recommendation is to have banks, securities firms and other financial institutions disclose their holdings of risky securities, such as those backed by subprime mortgages given to people with tarnished credit. Those subprime mortgages, which soured with the collapse of the U.S. housing market, were at the heart of the U.S.
crisis.
Another involves having credit rating agencies distinguish the ratings they give for regular securities, such as corporate bonds, from those they assign to more complex investments. These agencies have been criticized for contributing to the problems by not accurately assigning risk to mortgage-backed investments.
Yet another recommendation would strengthen supervisors' guidance to banks for dealing with cash crunches and having banks run "stress tests" to see how they cope under different scenarios of financial strain.
The plan also calls for the Basel Committee on Banking Supervision, an international body of regulators, to make sure banks have enough capital to cover any potential losses.
Meanwhile, ongoing efforts by the U.S., backed by the G7, to prod China to let its currency rise in value also were discussed. China's undervalued currency has been blamed for contributing to the United States' swollen trade deficit and the loss of millions of factory jobs. The G7 officials welcomed progress that Beijing has made on the currency front but said the country needs to move more quickly to let its currency rise in value.
The G7 officials welcomed efforts by some central banks, including the Fed, to expand lending to squeezed financial institutions to help ease market turmoil.
The head of Germany's central bank, Axel Weber, also welcomed U.S. efforts to stabilize markets. "I think that the measures that were taken in the U.S. have already had some effect," Weber said.
Paulson said there was intense interest among the G7 officials about the state of the U.S. economy, the world's largest.
When Bernanke was talking about it, "I didn't see anybody dozing off," Paulson quipped. The Treasury secretary acknowledged that the first three months of this year was a "tough quarter" and said he expected the current April-to-June period to be "relatively tough" as well. Many private economists believe the economy contracted in the first quarter and could still be ebbing now.
Masaaki Shirakawa, the governor of the Bank of Japan, said stagnation in the U.S. economy is enhancing uncertainty about the world economy. Ministers, he said, "have to recognize the complex situation."
Soaring oil prices also are complicating the global outlook.
In the United States, high energy prices are acting as a double-edged sword: they are causing people to spend less on other things, thus adding another drag on growth. And, they increase the risks of an inflation flare-up as other companies boost their prices in response. U.S. gasoline prices hit another record Friday of $3.365 a gallon, according to AAA and the Oil Price Information Service.
The G7 finance officials had a dinner scheduled for Friday night that was to include executives of some of the world's biggest financial companies. The idea: Look at the causes and consequences of the recent financial turmoil. Officials invited to those talks included top executives of Citigroup, Deutsche Bank, Barclays, Credit Suisse, Lehman Brothers and Morgan Stanley.
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Associated Press Writer Martin Crutsinger, Harry Dunphy, Foster
Klug and Desmond Butler contributed to this report.
