By Sumeet Desai and Andrew Hay
LONDON/MADRID (Reuters) - Britain launched a second bank rescue plan on Monday and Royal Bank of Scotland recorded the biggest loss in UK corporate history, while a cut in Spain's credit rating caused fresh market wobbles.
Announcing Britain's bank bailout, finance minister Alistair Darling said fourth-quarter GDP figures on Friday would confirm the UK was in recession for the first time since 1992.
RBS shares closed down 67 percent, denting British share indices, while concern about the rescue plan's multibillion price tag drove UK gilt futures to five-week lows and helped push sterling down nearly 1.6 percent against the dollar.
European Central Bank policymakers again talked down the chance of euro zone interest rates getting close to zero on Monday, even as Brussels forecast the region's economy would slump almost 2 percent in 2009.
"There is a way to go yet. Looking out toward the next year, there's no doubt the downturn in economies across the world is really quite sharp now," Darling said.
RBS said it made a loss of up to 28 billion pounds ($41 billion) in 2008, including a huge goodwill hit on its purchase of parts of ABN AMRO in 2007. The government's stake in RBS will rise to 70 percent from 58 percent.
The worst financial crisis in 80 years has already felled top banks and pushed much of the world into recession.
Spain suffered a credit rating downgrade by Standard & Poor's to "AA+" from "AAA," prompting the euro to tumble as investors feared others in the euro zone could experience the same fate as they spend heavily to refloat their economies.
The agency, which cut Greece's rating last week and has Ireland and Portugal under review, said government policy might be insufficient to counter what is expected to be Spain's worst recession in half a century and could cause a severe deterioration in public finances.
"What people are coming round to is that everyone's going to have a bad 2009, but Spain is probably going to have a very bad 2010," said Dominic Bryant at BNP Paribas.
European Central Bank President Jean-Claude Trichet said for the euro zone as a whole, "after an exceptionally difficult 2009, to consider 2010 as the year of recovery seems to me like a good working hypothesis."
Britain pumped 37 billion pounds ($55 billion) into the banks in October but credit remains scarce.
The UK government will now allow banks to insure themselves against losses on their riskiest assets. It will offer guarantees on their debt and set up a 50 billion-pound ($75 billion) fund to buy up high-quality securities to get cash flowing freely again.
Also on Monday, Irish bank shares plunged over 50 percent on fears for the banking sector after Anglo Irish Bank ALBK.I's nationalization last week.
Bank of Ireland CEO Brian Goggin said he would step down amid moves by Ireland to inject 2 billion euros ($2.6 billion) in the bank in exchange for 25 percent voting rights.
The British government gave the Bank of England a green light to increase money supply if it thought it necessary as interest rates, now at 1.5 percent, approach zero.
"It sounds very much like quantitative easing," said Alan Clarke, UK economist at BNP Paribas. "The government is giving the Bank of England an additional policy tool."
The Danish government unveiled a 100 billion crown ($17.8 billion) bank credit package of its own on Sunday. Shares in leading Danish banks slid on Monday as analysts doubted the aid would change banks' reluctance to extend credit.
The market mood is feverish -- shares in Britain's Barclays
crashed 25 percent on Friday prompting it on Monday to say it knew of no justification for that fall and that it expected to report annual profit well in excess of forecasts.
Its shares climbed but then slid back as RBS plunged 57 percent on the back of its colossal loss and Lloyds TSB
dropped 36 percent on fears for the sector.
"If recent history is a guide, any market euphoria related to such a bailout package generally evaporates on the realization that such mammoth support was required in the first instance," said Daragh Maher, Deputy Head of Global FX Strategy at Calyon.
One forecasting group said Britain's economy was set to shrink 2.7 percent this year, the biggest annual contraction since the end of World War Two.
In Washington, the incoming Barack Obama administration is also poised to act, saying it will make its bailout funds work harder to get credit flowing again to cash-starved consumers and companies.
A senior adviser to Obama, who will be sworn in as president on Tuesday, said the new team would soon change the way the second half of the $700 billion bank rescue scheme was run to make it more effective.
One option under discussion is a government-run "aggregator bank" that would absorb toxic debt weighing down banks' balance sheets. Obama is also working with lawmakers to launch an $825 billion fiscal stimulus plan by mid-February.
The U.S. economy has already been declared in recession. Data this week will do little to dispel the gloom.
In crafting one of the most eagerly awaited inaugural addresses ever, Obama will try to reassure recession-weary Americans they can rebound from hard times.
U.S. stock markets were closed on Monday for the Martin Luther King Jr. Day holiday.
(Writing by Mike Peacock; Editing by Giles Elgood and Peter Cooney)
($1=0.67 British pound)