TOKYO - FINANCE leaders of the world's top industrialised nations put on a show of solidarity on Saturday in the face of an economic slowdown and conceded that things could get even worse because of the crumbling US housing market.

In a communique released after meetings in Tokyo, the Group of Seven said prospects for economic growth had worsened since they last met in October, although fundamentals remained solid and the US economy was likely to escape a recession.

'In all our economies, to varying degrees, growth is expected to slow somewhat in the short term, reflecting wider global economic and financial developments,' finance ministers and central bankers from Japan, the United States, Canada, Britain, Germany, Italy and France said in the statement.

Debt-laden banks have curbed lending as their losses, tied primarily to souring US home loans, rise above $100 billion.

That has raised the spectre of a vicious cycle as consumer spending slows, prompting businesses to retrench and cut jobs.

US Treasury Secretary Henry Paulson said global markets may face a prolonged period of unrest.

'The current financial turmoil is serious and persisting,' Mr Paulson said in prepared remarks issued after the meeting.

'As the financial markets recover from this period of stress, as of course they will, we should expect continued volatility as risk is repriced.'

All together now

The G7 leaders urged banks to fully disclose their losses and shore up their balance sheets to help restore the normal functioning of markets.

'Going forward, we will continue to watch developments closely and continue to take appropriate actions, individually and collectively, in order to secure stability and growth in our economies,' the communique said.

Pledges to work together to restore the financial system to health contrasted with divisions over fiscal and monetary policy ahead of the G7 gathering.

Before Saturday's meetings, many in Europe had privately expressed alarm over the US Federal Reserve's aggressive interest rate-cutting stance after it slashed 1.25 percentage points off of the benchmark federal funds rate in less than 10 days in January.

The monetary easing, along with a $152 billion (S$215.4 billion) US fiscal stimulus package, threatened to open a rift between the United States and its allies over how to prevent the credit crisis from pushing the world into a downturn.

But tensions eased after the European Central Bank stressed the risk to euro zone economic growth, alongside its long-held worry about inflation, signalling that the ECB may soon join the Fed, Bank of England and Bank of Canada in cutting rates.

French Economy Minister Christine Lagarde said she welcomed that change by the ECB, but wanted more: 'It's like the overture of a symphony: you are always waiting for what comes next.'

European leaders were particularly concerned about the strength of the euro currency, which has soared against the dollar since the Fed began its cutting rates in September.

However, the currency retreated after the ECB's change of heart.

Currency on back burner

With more pressing economic matters to discuss, foreign exchange issues were relegated to the back burner at Saturday's meeting.

The communique contained similar wording as in the October statement, with a focus on encouraging China to allow its yuan currency to appreciate more quickly.

Many G7 leaders think the weak yuan gives China an unfair trade advantage, and have called on Beijing to step up domestic investment to help rebalance the world economy.

The statement also urged oil exporters to step up production after oil prices briefly topped $100 per barrel last month.

It has since retreated, though it spiked up 4 percent to $91.77 on Friday - its biggest gain in nearly two months - amid supply snags and a looming US cold spell. -- REUTERS

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