Japan slipped to the brink of deflation and inflation in Europe slid closer to zero, underlining a threat to the world economy before next week's G20 summit which is supposed to produce a cure for the crisis.

Policymakers from the Group of 20 leading wealthy and developing nations will also plan tougher regulations to ensure that mistakes that led to the banking crisis are not repeated.

But frustration is growing among leaders of emerging nations about how catastrophic errors in the boardrooms of the West are inflicting hardship on the world's poor, with Brazil's president attacking irrational behavior of white and blue-eyed people.

President Barack Obama is set to quiz leaders of the biggest U.S. financial institutions on Friday about developments in the economy and their businesses as his administration seeks broader power to regulate the financial system.

Global shares paused for breath on Friday at the end of a week that saw them gain nearly 7 percent on tentative hopes of economic recovery, while oil slipped below $54 a barrel after touching a 2009 high.

ZERO INFLATION

Recession plus a slide in oil prices pushed Japanese consumer price inflation to zero in February. Retail sales also fell further than expected, more evidence that slumping global appetite for Japanese exports is hurting domestic demand in the world's second-largest economy.

Japan is facing consumer price deflation, said Akira Maekawa, a senior economist at UBS Securities. Japanese companies are still producing more than consumers want to buy.

A small drop in some consumer prices does no great harm. But significant broad-based falls can inflict severe economic damage, as personal and corporate debt piles grow in real terms and consumers postpone spending, awaiting further price falls.

European policymakers have largely played down the risk of deflation, but data from German states on Friday showed that annual inflation is falling to very low levels.

In an early sign of the broader trend in the euro zone, the states of Hesse and Brandenburg reported consumer prices fell 0.2 and 0.3 percent respectively this month, producing annual inflation rates of just 0.2 percent in both -- their lowest rates in 22 and 10 years respectively.

The wider euro zone reports inflation data next Tuesday. Economists expect the annual rate to fall under 1.0 percent in March and sink further in the next few months.

That is well under the European Central Bank's 2.0 percent ceiling, opening the way for it to cut interest rates at its monthly policy meeting on Thursday. Economists expect it to lower the main rate by half a percentage point to 1.0 percent.

STRUGGLING TO STIMULATE

Britain's economy slowed even more sharply than expected in the last three months of 2008 as construction output plunged, official data showed on Friday. GDP fell 1.6 percent in the fourth quarter, the sharpest decline since 1980. Analysts had expected an unchanged reading of -1.5 percent.

Global policymakers have been struggling to stimulate economic growth, cutting interest rates to close to zero in many big economies, raising infrastructure spending and buying assets from banks and companies to pump more money into the system.

Japanese lawmakers are likely to approve on Friday the government's 88.5 trillion yen ($896 billion) budget for the fiscal year starting April 1, the country's largest ever.

British Prime Minister Gordon Brown hopes to persuade his fellow G20 leaders at the London summit on April 2 to agree on ambitious spending to lift the world economy out of recession. But his own central bank governor, Mervyn King, has questioned how much Britain can afford to borrow to fund this.

Speaking in Brazil on Thursday, Brown said Britain must not rule out taking action needed to boost growth. But his host, President Luiz Inacio Lula da Silva, gave an uneasy reminder of resentment growing in poorer nations.

(It is unfair) that the (poor) be the first to pay the bills of a crisis created by the rich -- not by any blacks, by any Indians, or by any poor, said Lula.

This is a crisis fomented by the irrational behavior of white and blue-eyed people, who before the crisis seemed to know everything, said Lula, who has often blamed the United States for causing a global crisis by practicing casino capitalism.

On the markets, Japan's broad TOPIX ended down 0.3 percent on Friday but finished the week 7.8 percent higher -- its biggest weekly gain since 1997. We've hit the bottom, we're making our way up, said Bell Potter Securities private client adviser Stuart Smith in Australia.

European stocks slipped 0.12 percent toward the end of a good week. In spite of the underlying concerns that we are in the midst of a bear market rally, the markets continue to perform robustly., said Chris Hossain of ODL Securities. Cutting away the rhetoric and hyperbole, if you have more buyers than sellers, markets will almost certainly head north.

(Additional reporting by Sebastian Tong, and Reuters bureaus around the world; Writing by David Stamp; Editing by Victoria Main)

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