US details bank aid; bats down nationalization talk

* U.S. to launch bank rescue program Wednesday

* Government may boost Citi stake - source

* France pledges aid for mutual banks set for merger

* Nomura, Mizuho announce capital raising

U.S. agencies detailed financial rescue plans on Monday and insisted they did not want to nationalize banks as investors fretted over how struggling firms will cope with rising recession-driven losses.

In a joint statement released shortly before U.S. stock markets opened on Monday, the Treasury Department, Federal Reserve and three other federal agencies said they will initiate a program on Wednesday to assess large U.S. banks' capital needs and determine whether a bigger buffer is warranted.

If so, the money could come from the private sector or the government in the form of preferred shares that convert into common stock over time as needed to ensure banks have enough resources to withstand deepening credit losses.

Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain in private hands, the agencies said.

Healthy banks are vital to stemming recession. While some economists have argued that nationalizing weaker institutions would be the fastest way to revive lending, many investors -- particularly in the United States -- worry that government intervention would have a chilling effect on business.

Citigroup, whose stock has been pounded by fears that the government may seize the bank and wipe out shareholders, was in talks to give the government a larger stake, a person familiar with the matter told Reuters.

Citi's stock briefly jumped more than 20 percent to $2.35 per share in early New York Stock Exchange trading. Major stock indexes around the world rose but later turned lower as Citi shares trimmed gains.

The idea under consideration would involve converting a big chunk of the $45 billion in preferred shares the government bought last year into common stock, putting as much as 40 percent of Citigroup into public hands.

The British government announced a similar move last month, saying it would convert preferred shares in Royal Bank of Scotland, which is expected to announce more restructuring this week.

France on Monday also reached out to its lenders, pledging up to 5 billion euros ($6.3 billion) in additional aid for Banque Populaire and Groupe Caisse d'Epargne.

The two mutual banks are expected to detail a merger this week and the new aid could give the government a stake of up to 20 percent in what is set to be France's second-biggest retail bank behind Credit Agricole.

LOSSES MOUNT

Banks around the world have already reported hundreds of billions of dollars in losses and write-downs as defaults spike on mortgages, credit cards, corporate debt and a host of other loans. Investors worry that losses will intensify as the economy weakens, and banks may lack sufficient resources to withstand any further deterioration.

Tighter credit conditions have constrained consumer and business spending, and contributed to a steep decline in global trade. Dresdner Kleinwort economists think corporate bankruptcies worldwide will rise by at least 20 percent this year, after a 14 percent increase in 2008.

Analysts said the fact the U.S. government would stop short of nationalizing Citigroup while at the same time helping boost its capital base reassured investors.

They are certainly moving much faster this time, and it can be taken as a commitment that some banks are too big to fail and the economic consequences too bad to contemplate, said Tony Morriss, senior markets strategist at ANZ investment bank in Sydney.

European Central Bank President Jean-Claude Trichet said on Monday that the financial crisis was spilling over into the wider economy and that the euro zone's financial system is under severe strain.

Joaquin Almunia, the EU's economic chief, said on Monday that the European Union could have to bail out a member state in financial trouble but such a move was unlikely, especially among countries in the euro zone.

European Union leaders at a weekend summit in Berlin backed a doubling of funds for the International Monetary Fund, which has spent billions of dollars in recent months shoring up economies in eastern Europe and elsewhere.

Latvia's government collapsed on Friday and the currencies of countries such as Poland, the Czech Republic and Hungary have come under severe pressure, hitting millions of citizens who have borrowed in foreign currencies such as the euro.

Emerging European Union central banks coordinated to prop up their currencies on Monday, with Czech central bank Governor Zdenek Tuma saying they had agreed that recent falls were overplayed.

In Asia, Japan's biggest brokerage Nomura Holdings Inc said it planned to raise 302 billion yen ($3.3 billion) by selling new shares to boost its capital.

Japan's second-largest bank Mizuho Financial Group said it would issue $850 million in preferred securities to replenish capital erased by a sliding stock market and economy.

The securities, which are not convertible to common stock and are aimed at overseas investors, will pay an annual dividend of almost 15 percent, underscoring the difficulty of securing cash in tightening markets.

Japan also saw its biggest bankruptcy of the year measured by debt as SFCG Co Ltd, a lender to smaller companies, failed with debts of $3.6 billion. (Additional reporting by Sudip Kar-Gupta, Megan Davies, Jason Neely and Alan Wheatley; Editing by Andrea Ricci)