Investor sentiment took another hit from the overnight collapse of the second largest US savings and loan institution, Washington Mutual, which heaped yet more pressure on markets.

World stocks jumped Thursday on signs a deal was near on the US government's plan to buy toxic mortgage-related assets from financial firms at the heart of the global credit crisis.

However, discussions about the proposal were gridlocked on Thursday as US lawmakers disputed the way forward, with Democrats accusing the Republicans of dragging their feet.

"Talks are set to resume today (Friday) and a deal remains likely to be reached, especially since the failure of Washington Mutual has raised the stakes even further," said Barclays Capital analyst David Woo.

"But until a rescue package is finalised, some of yesterday's market moves in anticipation of a plan being announced ... are likely to unwind somewhat."

In morning European trade, London's FTSE 100 index of leading shares fell 1.71 percent at 5,107.96 points, Frankfurt's DAX 30 lost 1.46 percent to 6,083.76 points and in Paris the CAC 40 shed 1.71 percent to 4,154.56.

In Asia, Tokyo closed down 0.94 percent, Sydney ended the day 0.5 percent down and Hong Kong lost 1.3 percent.

The US Federal Reserve, meanwhile, launched fresh joint action with other central banks on Friday to keep money markets alive pending a deal in Washington to end the worst financial crisis in decades.

According to a joint statement the central banks of the eurozone, Britain and Switzerland alongside the Federal Reserve launched operations to pump more dollars into markets for banks to borrow in one-week loans.

In doing so, the central banks are using reciprocal currency arrangements -- otherwise known as swaps -- with the Fed.

In Washington, US Democrats charged that Republican White House contender John McCain had sabotaged the rescue package, which they said had largely been agreed upon.

"John McCain did nothing to help, he only hurt the process," Senate Majority Leader Harry Reid told a joint news conference with Senate banking committee chairman Christopher Dodd.

"We are in a serious economic crisis in the country, if we don't pass a piece of legislation," US President George W. Bush said.

The US financial rescue hold-up sent oil prices down, with New York's main contract, light sweet crude for November delivery, falling 2.70 dollars to 105.32 dollars per barrel.

The contract rose 2.29 dollars on Thursday as a deal had appeared imminent.

"It seems like people who are watching the oil market are worried there could be some blockade" over the deal, said Dave Ernsberger, Asia director of global energy information provider Platts. The package is necessary if oil prices are to regain their upward momentum, he added.

Global markets have been sent into a tailspin since the collapse last week of Wall Street investment giant Lehman Brothers and the US government's rescue of insurance giant AIG.

The crisis claimed another scalp on Thursday as the US government closed struggling Washington Mutual, one of the country's largest savings and loans banks, allowing JPMorgan Chase to buy its operations for 1.9 billion dollars.

It has also led to global banking giant HSBC cutting 1,100 staff worldwide.

Meanwhile it emerged Friday Nomura Holdings will pay just a token two dollars for the Europe and Middle East operations of bankrupt Wall Street giant Lehman Brothers.

The top Japanese broker will acquire only Lehman's employees in the regions, and not its stocks, bonds or other assets, the Nikkei business daily reported.

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