Finance chiefs from the world's industrial powers pledged on Sunday to take whatever actions were needed to steady financial markets, spooked by the political wrangling in Europe and the United States over slashing their huge budget deficits.

With the twin debt crises raging and stock markets plunging, the Group of Seven leaders said after a telephone consultation that they intend to stay in close contact and were ready to take action to ensure stability and liquidity in financial markets.

The G7 -- the United States, Britain, Canada, France, Germany, Italy and Japan -- said that included joint action if needed in foreign exchange markets because disorderly movements ... have adverse effects for economic and financial stability.

The statement was designed to calm financial markets and followed a signal from the European Central Bank that it would buy up Italian and Spanish bonds. Market analysts said it should provide some reassurance as trading resumes on Monday.

The G7 has effectively drawn a line in the sand on contagion, said Christian Cooper head of U.S. dollar derivatives rating at Jefferies & Co in New York.

The G7 meeting followed Friday's downgrading of U.S. debt quality by rating agency Standard & Poor's and a week in which a European debt crisis threatened to engulf larger nations as Italy's borrowing costs shot higher.

The ECB's decision to start buying Italian and Spanish debt was viewed as a critical move to quell a bond rout that has rocked financial markets.

The promises to bring more policy action to bear on nervous markets, through coordinated measures, came in the face of new signs of continuing stress as stock, oil and commodity futures all dropped sharply in early Asian trading.

CHINA NOT APPEASED

China lashed out again at weak-kneed politicians in the United States and Europe for lacking the courage to tackle debt issues seriously -- a concern to Beijing because of its huge holdings of U.S.-denominated and other foreign debt.

It must be understood that if the U.S., Europe and other advanced economies fail to shoulder their responsibilities and continue their incessant messing around over selfish interests, this will seriously impede stable development of the global economy, said a commentary in People's Daily newspaper, the mouthpiece of China's ruling Communist party.

Market unease was heightened by Standard & Poor's decision to cut the U.S. debt rating to AA-plus from risk free AAA -- a move that Treasury Secretary Timothy Geithner bitterly condemned.

In an interview on NBC and CNBC television, Geithner said the rating agency has shown really terrible judgment and claimed its downgrade meant nothing and wouldn't affect investors' faith in U.S. debt.

In Frankfurt, ECB President Jean-Claude Trichet said in a statement after discussions with his Governing Council that the central bank welcomed new steps taken by Italy and Spain on fiscal and structural reforms, and hence it would actively implement its bond-buying program. A monetary source said this meant it is ready to start buying up the debt of these two countries.

The Euro system will intervene very significantly on markets and respond in a significant and cohesive way, the source said.

Trichet wanted the policy-setting Governing Council to take a final decision on buying Italian paper after Prime Minister Silvio Berlusconi announced new measures to speed up deficit reduction and hasten economic reforms, an ECB source said.

FRANCE, GERMANY ON SAME PAGE

On Sunday afternoon, German Chancellor Angela Merkel and French President Nichola Sarkozy weighed in with a joint statement praising both Italy and Spain for their pledges to impose budget austerity.

They stressed that complete and speedy implementation of the announced measures is key to restor(ing) market confidence.

The back-and-forth between Standard & Poor's and the Obama administration over whether the downgrade of Washington's rating was justified continued on U.S. Sunday-morning talk shows where a senior official from the ratings agency said its concerns about political impasse in Washington were valid.

John Chambers, an S&P managing director, said on ABC's This Week that years may be needed to regain AAA status and even them it would take, I think, more ability to reach consensus in Washington than what we're observing now.

Geithner, who had indicated he might leave the administration once an increase in the debt ceiling was agreed, said he was not doing so and would stay on.

That relieved President Barack Obama of the difficult prospect of finding a replacement who could win Senate confirmation in Washington's bitterly partisan atmosphere.

The ECB reactivated its sovereign bond-buying program on Thursday but purchased only small quantities of Irish and Portuguese bonds, seeking tougher austerity measures from Italy. That did nothing to stem market attacks on Italian assets.

Berlusconi's plans entail moving up a balancing of the budget by one year to 2013, enshrining a balanced budget rule in the constitution and pushing through welfare and labor market reforms after talks with trade unions and employers.

(Additional reporting by Laura McInnis, David Lawder and Mark Felsenthal in Washington, Sarah Marsh in Berlin, Astrid Wendlandt in Paris, Kim Yeonhee and Yoo Choonsik in Seoul, Praveen Menon and Shaheen Pasha in Dubai, and Reuters bureaux worldwide; Writing by Mark Heinrich and Glenn Somerville; Editing by Christopher Wilson))