Americans slashed spending and the country's business outlook weakened but there were signs of stabilisation in global markets on Friday, with interbank rates falling and US stocks posting their best week in 34 years.

But in a sign of the hurdles that lie ahead, the Bank of Japan slashed interest rates, British banking giant Barclays said it was raising $12 billion in capital and a top U.S. lawmaker demanded that banks use money from the country's $700 billion financial bailout package to boost lending.

How to shore up the decimated US housing market, which stands at the root of the global credit crisis, again took center stage on the last Friday before Americans go to the polls to choose their next president.

A US Commerce Department report showed consumers cut monthly spending for the first time in two years in September, evidently bracing for hard times as jobs continue to disappear and credit conditions tighten.

Another survey showed US consumer confidence in October suffered its steepest monthly drop on record.

"Consumers reported the most dismal assessments of their current financial situation ever recorded," the Reuters/University of Michigan Surveys of Consumers said.

Other reports showed business activity fell in the U.S. Midwest and New York City.

But there was at least one hopeful sign, as the closely watched interbank lending rates fell, suggesting that the moves taken by central banks and others to remove blockages in the credit system were working to some extent.

That helped push US stocks higher, with financial stocks leading a rally as investors picked up bargains following recent heavy losses. European shares reversed losses and followed Wall Street higher.

Nevertheless, the Dow Jones Industrial average in October had its worst one-month percentage drop since August 1998, while the dollar was on pace for its best month in more than 17 years.

The Bank of Japan cut interest rates for the first time in seven years on Friday in a move that followed a rate cut by the U.S. Federal Reserve on Wednesday. The European Central Bank and the Bank of England are expected to do the same next week.

In the euro zone, inflation fell to 3.2 percent year-on-year in October, data that was likely to ease any concerns at the ECB about rising prices.

A German government official told Reuters the economy contracted for a second consecutive quarter in the July-September period, putting it in recession.-Reuters