China and Japan called for global cooperation on Friday after a financial market rout signaled fear that Europe's debt crisis could spin out of control and the U.S. economy may slide into another recession.

The comments from Washington's two biggest foreign creditors pointed to growing concern of contagion as Asian stock markets tumbled following Wall Street's steep dive a day earlier. European markets hit a 14-month low in early trading.

French President Nicolas Sarkozy will discuss financial markets with German Chancellor Angela Merkel and Spanish Prime Minister Jose Luis Rodriguez Zapatero on Friday, Sarkozy's office said in a statement.

In Japan, Finance Minister Yoshihiko Noda said global policymakers needed to confront currency distortions, the debt crises and concerns about the U.S. economy.

I agree that these subjects should be discussed, he told reporters a day after Japan intervened to sell yen. Each problem is important, but how to prioritize these issues is something to discuss from here on in.

Japan sold yen on Thursday to try to cap the currency's rise, which puts its exporters at a competitive disadvantage. There was market talk that it had intervened again on Friday, although the currency bounced back quickly, which suggests Tokyo was not in the market. The yen has become a popular safe-haven bet as concerns about the United States and Europe grow.

China Foreign Minister Yang Jiechi said U.S. debt risks were escalating and countries should step up cooperation on global economic risks.

Yang, who is visiting Poland, called on the United States to adopt responsible monetary policies and protect the dollar investments of other nations.

The U.S. Federal Reserve holds its next policy-setting meeting on Tuesday, and economists say there is little more it can do to try to spur growth. A flurry of weak economic data and Europe's debt woes have fed fears of a fresh recession, triggering Thursday's sell-off on Wall Street, which was the worst since the global financial crisis.

Some $2.1 trillion in market value was wiped off the MSCI All Country World Index this week as of Thursday's close, Thomson Reuters Datastream showed, and that total looked set to rise on Friday as Asian and European stocks fell.

IHS Global Insight said there was now a 40 percent chance the United States could slip into recession.

CASH IS KING

The market rout extended into Asia on Friday, where markets skidded about 5 percent. Chinese lender China Everbright Bank Co Ltd delayed a planned Hong Kong share offering of up to $6 billion, sources told Reuters.

Japan and Switzerland are trying to reduce the allure of their markets as safe havens and after gold has more than doubled in price since the global financial crisis, many investors are having second thoughts about seeking refuge in the precious metal.

With investment options running out, funds are flooding into cash.

Bank of New York Mellon Corp said it had been overwhelmed with deposits, prompting it to charge some big customers a fee.

Investors slashed positions after the European Central Bank failed to include Italy and Spain in a fresh round of bond buying, even though yields on their debt shot above 6 percent, the highest level since the euro was launched over a decade ago.

ECB President Jean-Claude Trichet said there was not full support in the central bank for the action, underscoring deep divisions within Europe over how to handle a debt crisis that has forced Greece, Ireland and Portugal to seek bailouts.

Investors worry that Italy and Spain, the euro area's third- and fourth-biggest economies, could be next.

Sarkozy said France, Germany and Spain had talked to Trichet. U.S. officials from the Federal Reserve, the U.S. Treasury and the White House declined to comment on whether they were holding any discussions with European or Asian officials.

Investors had hoped the ECB would target Spanish and Italian debt in reviving its bond-buying stimulus program, but it restricted the purchases to Irish and Portuguese securities, not Italy's or Spain's.

Roberto Perli, managing director at ISI Group and a former staffer at the Federal Reserve, called the ECB's action mysterious.

It sent the wrong message, he said.

Belying a sense of crisis, many of Europe's policymakers are still on summer vacation, although EU Economic and Monetary Affairs Commissioner Olli Rehn broke away from his holiday to return to Brussels. He plans a news conference on Friday.

Italian Economy Minister Giulio Tremonti voiced frustration at the ECB's response. When he talked to Asian investors, they had told him: If your central bank doesn't buy your bonds, why should we buy them?

Longer term, some sort of supranational fiscal authority was needed, transferring some of the debt burden of troubled countries to the region as a whole, analysts said. That option is not seen as politically palatable to Germany and France now.

Analysts said they would look to see if European leaders are willing to expand its emergency financial stability fund to an amount that would put a floor under the market panic.

They say the fund, currently 440 billion euros, would need to be doubled or tripled to cover economies as big as Italy and Spain.

U.S. PROBLEMS COMPOUND UNCERTAINTY

In the United States, a similar sense of political paralysis reigns.

Just days after a bitterly fought, last-minute deal to raise the country's debt ceiling and avoid default, realization has sunk in that many elements of the $2.1 trillion deficit reduction plan are short term and not locked in place.

Doubt has spread through markets that Congress will stick to implementing it in full after the November 2012 elections.

This, combined with a bout of poor economic data, points to a heightened risk of another slump. Lawrence Summers, a senior adviser to the U.S. president until last year, argued in a Reuters column that there is a one in three chance of recession in the United States.

U.S. employment numbers will be critical to market sentiment. Forecasts are for a tepid 85,000 jobs added in July, but a weak number or even contraction would boost concern that the United States is heading into recession.

The U.S. jobless rate has risen for three consecutive months, and another increase would send a strong recession signal, Goldman Sachs said.

Many economists say chances are slim that Congress would endorse a further round of fiscal stimulus now that it is focusing on fiscal spending cuts.

I don't see a well functioning government that can do something, said Jeff Frankel, economics professor at Harvard University and former White House economic advisor under Bill Clinton. If everything is blocked politically, especially fiscal policy, there's nothing much you can do.

Options for the Fed are also severely restricted. Policymakers appear reluctant to embark on another round of bond purchases, particularly given how controversial the last program proved to be.

Still, Fed Chairman Ben Bernanke has noted other options, such as bolstering its assurance that rates will stay low for an extended period.

Nonetheless, few expect such efforts to have much of an impact, particularly since the economy's chief problem at the moment appears to be a lack of jobs, not credit.

The Fed has mentioned what their menu of tools is for easing, the problem there is several of them really have no significant macro economic benefit, said Michael Gapen, senior economist at Barclays Capital.

(Additional reporting by Kristina Cooke, Walter Brandimarte and Emily Kaiser; Editing by Stella Dawson, Neil Fullick and Dean Yates)

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