The eurozone crisis has left UK banks unable to raise the funding they need to make loans to businesses, evoking the spectre of the crunch that followed the collapse of Lehman Brothers. And on one critical measure - the cost of insuring banks against going bust - lenders are already facing tougher conditions than at the height of the crunch, the Bank said.

Sir Mervyn King, the Bank's Governor, said that because of the eurozone crisis, households, companies and banks face a period of extraordinary uncertainty, including a possible slide back into recession. "There is weakness over the next few quarters. No one can know what precisely the outcome will be," he said. "In the last three years, we have seen extraordinary events. Who knows what's going to happen tomorrow, let alone next month?"

The banks can only issue loans to companies and home owners if they can find sufficient funding on the markets. According to the Bank of England's inflation report, banks' funding in the three months to September fell to levels not seen since Lehman Brothers, the US investment bank, crashed in September 2008.

At a meeting of the Arab League in Morocco, he said diplomatic efforts were "close to the end of the road". As diplomatic pressure increases on Damascus, the situation on the ground is deteriorating as well. More and more clashes are being reported between the regular army and opponents who now call themselves the Free Syrian Army.

That raises the spectre of this turning into a full-scale civil war.

But Syria has shown little sign of compromise. At today's meeting here in Morocco, Arab ministers are expected to confirm Syria's suspension from the Arab League and possibly impose new measures. Syria's chair at the meeting is empty after Damascus angrily decided to boycott the meeting. Attitudes are hardening on all sides.

The plan to post up to 2,500 Marines in the Northern Territory from mid-2012 was unveiled Wednesday during a lightning visit to Canberra by US President Barack Obama, who said it was a "commitment to the entire Asia Pacific region." But it drew criticism from China, widely seen as the target of the move, with the foreign ministry questioning whether it was appropriate or "in the interest of countries in this region."

Obama said the notion that the United States was afraid of or trying to edge out China was "mistaken" but stressed during his remarks on the Australian military boost that the Asian powerhouse would have to "play by the rules. I've said repeatedly and I'll say again today that we welcome a rising, peaceful China," he said in a joint press conference with Prime Minister Julia Gillard on Wednesday. "The main message that I have said not only publicly but privately to the Chinese is that with their rise comes increased responsibilities. It's important for them to play by the rules of the road."

"There's going to be times where they're not and we will send a clear message to them that they need to be on track in terms of accepting the rules and responsibilities that come with being a world power." The Australian troop boost is seen as a clear statement by Washington that it intends to stand up for its interests in the region. The US has viewed with concern China's growing assertiveness in the region on territorial disputes, as have many of the Asian powerhouse's neighbours.

That, in turn, is fuelling inflation and increasing the pain for hundreds of thousands of Hungarians who took out mortgages in foreign currencies when the forint was much stronger. Fitch and Standard & Poor's on Friday shifted their credit outlook for Hungary, rated on the lowest investment grade, to negative - making a downgrade to junk status appear only a matter of time.

With the highest government debt among central and east European countries, Hungary has seen credit flows slow as investors have fled risk and the growth outlook for its biggest market - the eurozone - has darkened. There are now fears that Hungary's predicament could foreshadow a new wave of contagion to CEE countries, which were particularly badly hit by the 2008 financial crisis.

Hungary's centre-right Fidesz government is nonplussed. It says it has worked hard to control the budget deficit, targeting 2.5 per cent of gross domestic product next year, and started reducing government debt from the 80 per cent of GDP inherited from the previous administration.

"We are not Greece," says Zoltan Kovacs, a government communications minister. "We suspect some speculative steps behind this. It is not justified at all." Laszlo Akar, vice-president of GKI, a Budapest economic research institute, agrees that the current pressure is "not justified by the budget stance".

The Treasury aims to sell between 3 billion euros ($4.1 billion) and 4 billion euros of a new 10-year benchmark bond that will take its 2011 borrowing to almost 90 percent of the targeted amount. France, whose yield premium over Germany hit a euro-era high on Tuesday on fears it may lose its top-grade AAA rating, is also due to sell 6-7 billion euros of debt.

The Spanish auction will be the last before a general election on Sunday which is widely expected to usher the centre-right People's Party (PP) into power. With the crisis spreading to the 17-country currency's core, PP leader Mariano Rajoy will have little time to assure investors he can take control of Spain's finances and stop it becoming the fourth member of the bloc to require a bailout.

A successful Spanish T-bill auction on Tuesday and the recent rise in Spanish debt yields means the paper is likely to attract demand but the cost will be high, with an average yield of around 6.5 percent expected by analysts. A 10-year yield of more than 7 percent is generally regarded as unsustainable for countries to finance their debts.

Over the past year, as the Federal Reserve massively increased its holdings of US Treasury securities and entities in China marginally decreased theirs, the Fed surpassed the Chinese as the top owner of publicly held US government debt. In its latest monthly report, the Federal Reserve said that as of September 28, it owned $1.665 trillion in US Treasury securities. That was more than double the $812 billion in US Treasury securities the Fed said it owned as of September 29, 2010.

Meanwhile, as of the end of this September, entities in mainland China owned $1.1483 trillion in US Treasury securities, according to data published today by the US Treasury Department. That was down slightly from the $1.1519 trillion in US Treasury securities the Chinese owned as of the end of September 2010, according to the same Treasury Department report.

Thus, at the end of September 2010, the Chinese owned about $339.9 billion more in US Treasury securities than the Fed owned at that time. By the end of September 2011, the Fed owned about $516.7 billion more in US Treasury securities than the Chinese owned.

"Unless the euro zone debt crisis is resolved in a timely and orderly manner, the broad credit outlook for the US banking industry could worsen," the New York-based rating company said yesterday in a statement. Even as US banks have "manageable" exposure to stressed European markets, "further contagion poses a serious risk," Fitch said, without explaining what it meant by contagion. The "exposures" of US lenders to major European banks and the stressed nations of Greece, Ireland, Italy, Portugal and Spain, known as the GIIPS, are smaller than those to some of the continent's larger countries, Fitch said.

The six biggest US banks - JPMorgan Chase & Co (JPM), Bank of America Corp (BAC), Citigroup Inc (C), Wells Fargo & Co (WFC), Goldman Sachs Group Inc and Morgan Stanley (MS) - had $50 billion in risk tied to the GIIPS on September 30, Fitch said. So-called cross-border outstandings to France for all except Wells Fargo were $188 billion, including $114 billion to French banks. Risk to Britain and its banks was $225 billion and $51 billion, respectively.

Europe's debt crisis has toppled four elected governments, with the last two, in Greece and Italy, falling last week. Italian bond yields remained at about 7 percent - the threshold that led Greece, Portugal and Ireland to seek bailouts - and shares of French banks, including BNP Paribas (BNP) SA and Societe Generale (GLE) SA, dropped amid concern they'll need more capital.

"Everything that we have seen and heard suggests that we may have tens of thousands of people tomorrow protesting. The protesters are calling for a massive event aimed at disrupting major parts of the city," Deputy Mayor Howard Wolfson told reporters this afternoon. Wolfson and Deputy Mayor Cas Holloway said all city agencies are on notice and extra cops will be on hand for the massive demonstrations - which could disrupt the morning commute and be among the largest in city history.

Holloway conceded commutes may take longer than usual. Organizers said they were energized by Mayor Bloomberg's decision early to end the two-month-long camp-out at Zuccotti Park. "We will shut down Wall Street," a post on the movement's Facebook page said. "We will ring the People's Bell, and initiate a street carnival in which we rebuild and celebrate the neighborhoods that the Wall Street economy has destroyed." The march on Wall Street is slated to start at 7 am.

Other events scheduled for the day include "Occupy the Subways" in all five boroughs at 3 pm, a takeover of Foley Square at 5 pm and another march across the Brooklyn Bridge.

Environment chiefs last night warned that with mild dry weather set to continue for the next few weeks, the UK could be heading for a winter drought which could have disastrous consequences. Cambridgeshire, South Lincolnshire and Northamptonshire had half the normal rainfall during September and October.

As a result, Anglian Water has applied for a drought permit to drain water from the River Nene to top up reservoirs which are only half full. It has applied to the Environment Agency to drain an extra 17 million litres a day between December and April. Farmers are also irrigating at night to reduce the amount of water evaporating as November temperatures remain above the average for the time of year.

Ciaran Nelson, spokesman for Anglian Water, said: "It may seem strange as you usually think of having to save water when it is hot. "But in fact this is the time of year when we need to save water the most as the reservoirs should be filling up ready for next spring."

European shares and the bonds of weaker euro zone countries recovered initially on the move on the day Italian Prime Minister-designate Mario Monti was to name a national unity government to implement long delayed structural economic reforms. "They're heavily in on Italy and Spain, 2-10 years," one trader said of the central bank intervention. Yields on Italian government bonds fell just below the 7 percent danger level, widely seen as unaffordable in the long term.

But ECB policymakers continue to reject growing international calls to intervene decisively as Europe's lender of last resort, stressing it is up to governments to resolve the debt crisis through austerity measures and reforms. Shares and the euro have tumbled over the last week as bond market contagion spread to AAA-rated France, the euro zone's second economy and a mainstay of the currency bloc's rescue fund. The risk premium investors charge for holding French debt rather than benchmark German 10-year Bunds hit another euro lifetime high above 190 basis points on Tuesday.

President Barack Obama turned up the heat on Europe to act more boldly to extinguish the spreading bushfire. "Until we put in place a concrete plan and structure that sends a clear signal to the markets that Europe is standing behind the euro and will do what it takes, we are going to continue to see the kinds of market turmoil we saw," he said on a visit to Australia.

Many analysts believe the only way to stem the contagion for now is for the European Central Bank to buy large amounts of bonds - effectively the sort of quantitative easing undertaken by the US and British central banks. This has been anathema in Germany. But on Tuesday Peter Bofinger, a member of the group of economists that advises the German government, said the ECB should indeed become the euro zone's lender of last resort if the bloc's debt woes risked tearing apart the financial system.

"If politics can't do it, then the ECB must do all it can to bring interest rates down to more reasonable levels," Bofinger said at Euro Finance Week.

The agreement, formally unveiled by Obama during a joint news conference with Australian Prime Minister Julia Gillard, will allow up to 250 US Marines to be stationed in northern Australia beginning next year. Obama insisted that any notion that the United States fears China or wants to exclude the growing power from American economic alliances in the Asia-Pacific region is mistaken. But he said the United States will keep sending a clear message that China needs to accept the responsibilities that come with being a world power. "It's important for them to play by the rules of the road," Obama said.

The US and China's smaller Asian neighbors have grown increasingly concerned about China claiming dominion over vast areas of the Pacific that the US considers international waters, and reigniting old territorial disputes, including confrontations over the South China Sea. China's defense spending has increased threefold since the 1990s to about $160 billion last year, and its military has recently tested a new stealth jet fighter and launched its first aircraft carrier. Obama said the new deployment to Australia was important because it would help partners in Asia feel that "we have the presence that's necessary to maintain the security architecture in the region."

The agreement sets standard rules for commerce. Obama said that while the US is not intentionally excluding China from the agreement, joining the pact will require Beijing "to rethink some of its approaches to trade." The US has accused China of undervaluing its currency to make Chinese exports cheaper and US exports to China more expensive. China had a $273 billion trade surplus with the US last year and US lawmakers say the imbalance hurts American manufacturers while taking away American jobs.

The financial losses for the year ended September 30 came despite deep cuts of more than 130,000 jobs in recent years and the closing of some smaller local post offices. Losses will only accelerate in the coming year, Postmaster General Patrick Donahoe warned, citing faster-than-expected declines in first-class mail. He implored Congress to take swift, wide-ranging action to stabilize the ailing agency's finances as it nears a legal deadline Friday to pay $5.5 billion into the US Treasury for future retiree health benefits.

Congress is expected to grant a reprieve, but that will only delay the day of reckoning for an agency struggling for relevance in an electronic age. Based on current losses, the Postal Service says it will run out of money - or come dangerously close - next September, forcing it to halt service. "We are at a point where we require urgent action," Donahoe said.

In the event of a shutdown, private companies such as FedEx and UPS could handle a small portion of the material the post office moves, but they do not go everywhere. No business has shown interest in delivering letters everywhere in the country for a set rate of 44 cents for a first-class letter. "The Postal Service is in a tailspin," said Art Sackler, coordinator of the Coalition for a 21st Century Postal Service, which represents the private-sector mailing industry. "Without congressional action, there is a strong likelihood the Postal Service will have to shut down sometime next summer, dealing another critical blow to the economy and the 8 million private sector jobs that still depend on the mail."

Global stocks and the euro fell as Italian bond yields climbed back to unsustainable levels on doubts that Italy's Mario Monti and new Greek leader Lucas Papademos, unelected technocrats without a domestic political base, can impose tough austerity measures and economic reform.

European Central Bank President Mario Draghi has predicted the 17-nation currency bloc will be in a mild recession by the end of the year, a view underlined by data showing the economy barely grew in the third quarter and faces a sharp downturn. "The risks of a technical recession have increased and we expect the economy in Germany to shrink at least in one quarter," said Michael Schroeder of the German economic research institute ZEW.

On the markets, Italy's 10-year bond yield rocketed back above 7 percent, pushing its borrowing costs to a level that helped to trigger the fall of Silvio Berlusconi's government last week and is widely seen as unsustainable in the long term. Spain's Treasury paid yields not seen since 1997 to sell 12- and 18-month treasury bills. French banks are among the biggest holders of Italy's 1.8 trillion euro public debt pile.

The common currency fell as far as $1.3497 overnight as French bond yield spread over benchmark German bunds hit euro-era highs, and Italian yields shot back above the critical 7 percent level. It last stood at $1.3525, versus $1.3546 late in New York, below the ichimoku cloud base at $1.3568. A break and close below $1.3480 will pave the way for a move back to the October 4 trend low at $1.3145, traders said.

A turnaround on Wall Street, which closed in positive territory on the back of stronger-than-expected US data helped halt the euro's slide. But overall sentiment remained bearish. "While it is clear that the data in the US is improving, European concerns far outweigh at present," said David Scutt, a trader at Arab Bank Australia in Sydney.

"Markets are clearly expecting a circuit breaker to alleviate pressure on periphery bond yields. If no announcement is forthcoming in the days ahead, one suspects that situation could unravel fairly quickly."

- 'Only going after their [Britain's] own benefit, and refusing to contribute, is not the message we're letting the British get away with'

- Tory MP: 'British people will be horrified by what is going on in Europe'

- Gap between French and German government bond yields reaches record levels - revealing fears about Paris's exposure debt

The UK has a duty to help the eurozone despite being outside the single currency, according to one of Angela Merkel's closest allies. Even more provocatively, Volker Kauder warned Britain could not block a financial tax that would cost the City billions.

He insisted it was wrong for London to defend its own interests, adding: 'Only going after their own benefit, and refusing to contribute, is not the message we're letting the British get away with.' He said European nations were speaking German in that they were backing Chancellor Merkel's diktats. The comments will cause fury among senior Conservatives, who say Germany's refusal to prop up the euro threatens to drag the UK economy down as well.

British people will be horrified by what is going on in Europe,' said Philip Hollobone, a Eurosceptic Tory MP. 'Foreign policy going back to the time of Henry VIII has been to try to prevent conglomeration of power on the continent of Europe which would be against British national interests. Here we are in the 21st century with a German attempt to create a single economic and political bloc. This is Britain's golden chance to get out of the European quagmire and set ourselves free.'

Mr Kauder, parliamentary leader of Mrs Merkel's Christian Democratic Union party, insisted EU governments were backing Germany's push for closer integration of their economies in response to the turmoil. He said there was now widespread support for strict limits on debt levels in eurozone economies, with sanctions applied to any that step out of line. 'Now, all of a sudden, Europe is speaking German,' declared Mr Kauder. 'Not as a language, but in its acceptance of the instruments for which Angela Merkel has fought so hard.' He said Britain must be less self-centred in its relationship with Europe.

The Prime Minister used his annual foreign policy speech at the Lord Mayor of London's banquet on Monday night to insist that the crisis in the eurozone provided an opportunity for the EU be refashioned as a looser union.