The credit crunch is one of the worst financial crises in decades and rich nations must consider all options to calm markets and stem the economic fallout, Chancellor Alistair Darling said on Monday.

Jittery investors, businesses and consumers around the world are looking to the Group of Seven leading industrialised nations to come up with a solution to the crisis which has raised the spectre of a global economic downturn.

There has been speculation the G7 could resort to more drastic action when it meets in Washington on Friday than just promising to tighten up regulations and demanding more openness in the hard-hit financial sector.

"The problems in financial markets have intensified and spread globally to create one of the most severe financial shocks for decades," Darling said in a letter to finance ministers before the meeting.

"Growth in each of our countries is now expected to be lower, and the risks are greater, than when we last met."

"The G7 should lead the international response to these events... It is essential that we have a clear plan of action... We should also consider the full range of policy options to ease current market conditions."

Policymakers have been ramping up the rhetoric ahead of the summit, hoping the G7 will not only agree on a joint plan but also have the conviction to turn it into reality.

"I look forward to discussing with you the actions that we need to take both to ease ongoing strains in global financial markets and to strengthen the resilience of the financial system for the future," Darling said.

"These will be essential to avoiding further negative effects on growth in our economies."

FAILED BANKS

The British government has already had to nationalise failed mortgage lender Northern Rock because of the credit crisis which stemmed from bad U.S. mortgages and complex credit derivatives before rattling confidence in wider markets.

Most analysts expect the G7 to agree to act on recommendations to improve disclosure among banks and transparency on markets from the Financial Stability Forum.

"We must ensure that the FSF recommendations are met with a clear commitment to act at both a national and international level," Darling said.

"Rapid implementation of the FSF report will not only help to strengthen the global financial system for the longer term but should help to support confidence and calm current turbulence."

But steps as drastic as bank bailouts and mortgage repurchases with public money could also be considered.

Darling is also eager to get the G7 to work together with the IMF and the FSF to form an early warning system for markets.

"We can and should do more to reinforce the cooperation between supervisors in the oversight of more integrated firms and markets," he said.

"Therefore I am also proposing the rapid establishment of international supervisory colleges for global financial groups."