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Credit Continues to Thaw, But Recession Jitters Grow

Global credit markets continued to show signs of thawing Wednesday, but worries about a world-wide recession loomed over financial markets.

A day after the US and other countries announced further steps to shore up the struggling banking system, key lending rates eased further. The London interbank offered rates, or Libor, the benchmark for many other interest rates, also fell.

"Following the release of national 'bailout' plans from UK, Germany, France, U.S. and others, there are early signs that the severe money-market tension of the last month may be easing," said Meyrick Chapman, strategist at UBS. "We think the easing will continue."

But investors on Wall Street and around the world weren't able to cast off their worries—despite the latest financial rescue plan.

US stocks slumped after JPMorgan Chase reported a whopping 84 percent decline in its third-quarter profit. And, European and Asian markets mostly fell back Wednesday following a strong two-day rally.

Investors also turned their gaze toward the economy's obstacles: vanishing jobs, shrinking paychecks and nest eggs, and slumping home values continue to force millions of Americans to pull back.

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Sales at the nation's retailers fell with a thud in September, dropping by 1.2 percent, the most in three years. And while wholesale prices dropped for the second straight month, they are still up sharply over the past year and are squeezing businesses.

Uncertainty about the economy—and their own financial fortunes—probably will force consumers and businesses alike to hunker down further, spelling more problems for the already troubled economy.

Many economists believe the country is on the edge of—or already in—its first recession since 2001.

Even Federal Reserve officials are joining in. Janet Yellen, President of the San Francisco Fed, said Wednesday that the U.S. economy appeared to be in a recession and would likely contract in the fourth quarter after near-flat growth in the third.

"The outlook for the U.S. economy has weakened noticeably," Yellen said in a speech. "Virtually every major sector of the economy has been hit by the financial shock."

President Bush, meanwhile, said Wednesday that the latest financial rescue plan will restore the US economy's health, but added it will take time and patience.

A day after announcing a $250 billion cash infusion into US banks in return for a stake in those institutions, Bush and Treasury Secretary Henry Paulson said the plan should stabilize the system, induce banks to lend again, and—eventually—help improve the economy.

"This will take time. There will be challenges," Paulson said in a television interview. He acknowledged that he initially opposed this type of government intervention into the banking industry but that new facts changed the circumstances in recent days.

Paulson said, "There's no doubt that the way to get the maximum bang for the taxpayers here was to invest in banks."

He said he was more confident the system would right itself because of the steps the U.S. and other countries had taken recently to pry open locked lending that has stifled the global economy.

Anxiety about the economy is the No. 1 concern of US voters.

With the presidential election just weeks away, Democrat Barack Obama and Republican rival John McCain are working furiously to convince people that each is the best choice to steer the economy through these perilous times.

Democrats on Capitol Hill are pushing for another round of stimulus that could cost as much as $150 billion, an effort to provide additional relief and lift the country out of the doldrums.

—AP and Reuters contributed to this report.