Global recession fears returned to centre stage on Wednesday after trillions of dollars pledged by governments around the world for bank bailouts eased the threat of imminent financial meltdown.

In a reminder of the dire state of the world economy, a senior US Federal Reserve official said the world's biggest economy already appeared to be in recession, while Bank of Japan Governor Masaki Shirakawa said global financial markets remained very strained.

The US government on Tuesday put aside its misgivings about state intervention in the private sector and unveiled a plan to spend up to $250 billion on equity stakes in US banks, joining a global effort to shore up the banking system.

The plan, coming hot on the heels of big bank bailouts announced in London, Paris, Berlin and other world capitals, helped sustain a two-day stock market rally after the worst week in markets' history.

But share markets turned lower in late Wall Street trade and Asian markets fell on Wednesday on concern the rescue would come at a huge economic cost and do little to repair the damage already done by a 14-month credit crunch.

"While the financial system crisis appears to be heading in a positive direction, the economy appears to be increasingly bad, and this is raising worries about company earnings. We still don't know how much these might be hit," said Hiroaki Osakabe, a fund manager at Chibagin Asset Management in Japan.

The Dow Jones industrial average closed 0.8 percent lower and the S&P 500 was down 0.5 percent. Both indexes on Monday had registered their biggest one-day points gain in the wake of last week's panic sell-off. Tokyo shares dropped 1.4 percent after clocking up their biggest ever daily gain on Tuesday.

Oil prices fell, while the yen and US Treasuries climbed, amid worries that the bank rescue package could push up government borrowing, with the 2008 U.S. budget deficit already at a record $455 billion.

Governments have pledged around $3.2 trillion in a variety of schemes that guarantee bank deposits, bank-to-bank lending, and the purchase of new securities to shore up bank capital. That money is on top of huge open-ended central bank commitments to inject temporary funds to get lending moving again in the face of the gravest financial crisis since the Great Depression in the 1930s.

The nagging uncertainty over how much damage the repackaged toxic US debt linked to US low-quality mortgages has inflicted on corporate and bank balance sheets has made banks increasingly reluctant to lend, threatening to strangle the global economy.

The crisis reached new proportions last month when the failure of Wall Street stalwart Lehman Brothers and US government bailouts of mortgage giants Fannie Mae and Freddie Mac and insurance firm AIG, raised the spectre of an all-out financial sector meltdown.

A flurry of initiatives, including last week's unprecedented round of coordinated interest rate cuts, has calmed fears of a global bank sector collapse and put funds back into money markets, the lifeblood of the financial system. - Reuters