The risk that Pakistan could become the bankrupt state it was before a military coup nine years ago loomed larger on Monday as the rupee struck an all-time low and its debt was relegated deeper into junk bond territory.

The six-month-old civilian government led by President Asif Ali Zardari is engulfed with crises left behind by former army chief General Pervez Musharraf, who resigned as president in August.

On Monday, amid gloom over an economic morass and a security threat posed by Islamist militants after Islamabad's Marriott Hotel was blown up last month, the rupee hit 78.65 per dollar. That took its loss since the start of the year to more than 21 percent.

The central bank has just enough foreign currency to cover two months of imports, and a potential default on a sovereign loan is looming in February.

The fiscal and current account deficits are unsustainable. Inflation is over 25 percent and rising.

Rating agency S&P cut the rating on the country's sovereign debt rating to CCC-plus, a few notches above default level.

S&P said Pakistan's worsening external liquidity may imperil its ability to meet about $3 billion in upcoming debt payments.

"The Pakistani authorities now need to demonstrate that the financing gap in the balance of payments is capable of being bridged," said Tim Condon, economist at ING Bank in Singapore.

Analysts say Pakistan's best hope lies in the goodwill of multilateral lenders and friendly governments, like the United States and Saudi Arabia, keen to see the six-month-old civilian government succeed and stop a nation on the front line of the global war on terrorism sliding into chaos.

"That's their only lifesaver. The rest is a mess," said a Singapore-based fixed income fund manager from a major US asset management firm, who asked not to be named.

The Asian Development Bank finally came through with a $500 million loan last week, but much more was needed. An adviser to Prime Minister Yousaf Raza Gilani said last week that $3-4 billion was needed fast to stabilise the economy.

Pakistan's foreign reserves fell $690 million to $8.13 billion in the week that ended on Sept. 27. The State Bank of Pakistan said its own reserves fell to $4.68 billion, representing a little over two months of import cover.

The constant pressure to pay import bills and meet debt payments has drained liquidity, and forced the government to borrow more from the central bank.

Data released on Monday showed government borrowing was more than 100 percent up at $2.21 billion -- all of it from the central bank -- in the first 11 weeks of a fiscal year that began on July 1, compared with year-ago levels.

Coming back on Monday for the first full day's trading since the Muslim festival of Eid al-Fitr, Pakistan's illiquid money markets saw volatile call money rates surge to 40 percent before settling back below 30 percent.

Pakistani bankers called for urgent central bank action to stop a liquidity crunch putting banks in jeopardy. "It should do something immediately, as there is risk for systematic failure," said a senior banker, who requested anonymity due to the authorities' sensitivity regarding management of the markets.

Some bankers said they expected State Bank of of Pakistan to cut banks' statutory liquidity requirement (SLR) or cash reserve requirement (CRR) by at least 50 basis points, or possibly both.

Longer term, bankers said the central bank may need to raise the discount rate, which was hiked to 13.0 percent in July.

While the currency has slid and the money market dried up, Pakistan's stock market has been propped up by an artificial floor placed under the index at the end of August.

Authorities are expected to review on Friday how long to keep the floor and to consider establishing an exit mechanism for foreign investors, a senior official told Reuters.

The floor has killed trading volumes, with investors unable to sell at prices that could attract buyers in a market that has lost almost 35 percent since the start of the year.

The benchmark 100-share index ended flat at 9,178.97,  less than 34 points above the 9,144 floor.

The imposition of an index floor could result in Pakistan being removed from the benchmark MSCI emerging equities index.

Remy Briand, the global head of index research at MSCI Barra warned that countries which curb the free flow of capital were likely to be relegated to the "frontier markets index", which covers economies with underdeveloped stock markets. -Reuters