Iceland's financial authorities took over the country's second largest bank on Tuesday and shares in some of Britain's biggest banking names tumbled, the latest victims of the global financial crisis.
Western governments and central banks faced demands for coordinated action after Australia responded to the growing crisis by cutting its interest rates by 100 basis points.
Iceland, a country of 300,000 in the North Atlantic, is battling to stave off national bankruptcy after its banks took on massive debts in expanding overseas.
The country's market authority took control of Landsbanki using sweeping new powers introduced overnight. Russia would provide a loan of 4 billion euros ($5.44 billion), the Icelandic central bank said.
In a further sign of the fear gripping markets, shares in some of Britain's biggest high street banks fell sharply again on reports of funding talks between the government and banks.
Royal Bank of Scotland was the biggest loser, with its shares down more than 30 percent to a 13-year low.
Responding to the crisis, Australia's central bank slashed its benchmark cash rate by 100 basis points, the biggest single cut since 1992. Investors hoped that central banks in Europe and the United States could follow suit.
US officials have called for a "forceful and coordinated" global reaction to kickstart anaemic bank lending but such a unified approach remains elusive.
"Policymakers urgently need to get some traction in their policy initiatives, if disaster is to be avoided," Barclays Wealth told its clients in a note.
"Policymakers cannot make any more mistakes: the clock is ticking, and it is one minute to midnight," it added.
European Union finance ministers were meeting in Luxembourg to try to flesh out promises to counter market mayhem and ensure no savers lose any money. The EU has been criticised for its fragmented response to the crisis and the way individual countries have broken ranks with deposit guarantees.
"We need to find a common solution as one country's solution may be another country's problem," said Swedish Finance Minister Anders Borg.
The banking upheaval that began on Wall Street has effectively shut down interbank and other loan markets, pushing industrialised countries closer to recession. Conditions remained poor for interbank lending.
Sparked by the collapse in the US housing market and increase in bad loans, the crisis is the worst to hit the banking world in 80 years. People around the world are worried about protecting their savings and keeping their jobs as some of the pillars of global finance give way. -Reuters