Obama signs stimulus as auto plans due

By Jonathan Spicer

NEW YORK (Reuters) - U.S. President Barack Obama signed into law a $787 billion economic stimulus plan, while automakers prepared to submit long-awaited restructuring plans and global markets were undercut by worries that Eastern Europe''s hard-hit economies will drag down Western banks.

Questions over the effect emerging markets will have on the global downturn drove stocks down ahead of the presentation of cost-cutting plans from two of Detroit''s Big Three automakers. U.S. stocks closed at their lowest levels since November 20.

Elsewhere, a Texas billionaire was charged with "massive ongoing fraud" and Japan''s finance minister resigned under suspicion he was drunk at a G7 press conference, further eroding public confidence in governments and institutions.

"Underlying all that is uncertainty as to where the bottom is both in the economy and the market," said Bucky Hellwig, senior vice president at Morgan Asset Management in Birmingham, Alabama.

"As we retest these November lows, the reality that sets in is that we may have another leg to go down in the economy and the market. Therefore, we see stocks being sold off," he said.

With concerns growing over the investments Western banks made in Eastern Europe, stocks and oil prices tumbled across the board while bonds and gold shot up.

The Dow closed 3.8 percent lower at 7,552.60 and the broader S&P 500 dropped 4.6 percent. An index of leading European shares had closed down 2.5 percent.

The euro fell to a two-and-a-half-month low against the U.S. dollar after a Moody''s Investors Service report said the recession in Eastern Europe will be more severe than elsewhere.

A combination of higher provisions for bad debt, a rise in bank borrowing costs and falling Eastern European currencies will weigh on banks'' profitability and erode their capital base, Moody''s said in a statement released overnight.

Standard & Poor''s told Reuters it could review ratings on European banks following the Moody''s report, which highlighted the investments Italian, Austrian and French banks made in Eastern Europe.

U.S. Secretary of State Hillary Clinton, visiting Japan, called for coordinated action to revive the global economy, crippled after a collapse in the U.S. housing market and a crush of defaults on subprime mortgages spawned a credit crunch last year.

German Chancellor Angela Merkel said again that banks should not be absolved of their responsibilities and the state should not take on bad assets.

AWAITING SURVIVAL PLANS

In Denver, Obama said the stimulus package was only one part of a plan to solve America''s economic ills. In addition, the United States hopes a $17.4 billion bailout will help its badly bruised auto industry.

General Motors Corp and Chrysler LLC, majority-owned by Cerberus Capital, have been asked to submit survival plans to justify the loans, and were due to present measures to aggressively cut costs later on Tuesday.  Continued...