Mendelsohn said the situation isn't hopeless, and the G7 meeting is an opportunity to fix the system. "They've got to come up with a plan on Monday," he said. "Everybody's got to know what the rules are, how the system's going to work moving forward. You have to throw as much money as it takes."

Traders were closely eying an auction of credit default swaps related to bankrupt brokerage Lehman Brothers. The auction is expected to bring heavy losses to sellers of the swaps, which function as insurance against a default on company debts. The market for these derivatives has been tied up as credit markets showed at best a mixed reaction to internationally coordinated rate cuts initiated earlier in the week.

The initial result of the auction was that sellers of Lehman credit-default swaps would have to pay 90.25 cents on the dollar, although the final price of the derivatives will be determined at 2 p.m.

"The Lehman auction could turn things around," said Paul Nolte, director of investments at Hinsdale Associates. "What has to enter the market, I think, is some level of trust. And right now, there isn't." He said that seeing the Lehman credit-default swaps clear will help get the financial system moving again.

Three-month dollar Libor, a measure of the rates banks charge one another for large loans, climbed to a new high of 4.82%, although rates on the nine- and 12-month maturities were declining. The cost of overnight borrowing, which has been highly volatile in recent weeks, declined by more than half, to 2.47% from 5.09%.

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