Australian shares fell sharply, down by just under 4% by midday, about half the size of the fall on Wall Street, but to lows not seen for more than three years.

Australian banks maintained a record $10.64 billion in their exchange settlement accounts at the Reserve Bank overnight ahead of the vote in the US and while failures and rescues rippled across the European financial system during the day and into the night.

It was $3 billion more than the $7.5 billion kept in the ESA over the weekend by the banks and yet another sign of how terrified the banks are about lending to anyone, including each other.

The Reserve Bank kept the system almost balanced in its morning market operations, injecting $1.946 billion in total, to meet a system deficit of $1.871 billion.

In Tokyo the Bank of Japan pumped in $19 billion, or around $A24 billion to maintain liquidity. This was after the RBA and the BOJ boosted their swap agreements for US dollars with the Fed overnight: Australia added $A20 billion to last week’s $US10 billion, the Bank of Japan doubled its arrangements to , $US120 billion.

The credit freeze is still the most the central problem for markets, but the domino like plunge in markets after the Washington shock rejection of the Paulson bailout plan was where the action was.

After falls of 7% to more than 8% on wall Street, Asian markets were down 4% to 6% and more at times this morning.

Our market was off over 5%, but rose slightly around 11am to midday to be off around 4%, or around 190 points. Tokyo was down by just on 5%: banks were hammered lower in both markets and commodity and resource stocks like BHP and Rio took a pounding on the drop in metal and oil prices.

Analysts said $A50 billion was knocked off the valuation of our market in the first half hour of trading this morning, a trillion dollars in the Us and around the same off markets in Europe and Asia.

Margin calls were extensive this morning, helping add to the selling pressures.

Economists said the chances of a co-ordinated global interest rate cut were rising, with Macquarie Bank interest rate strategist, Rory Robertson suggesting that the chances of a half a per cent cut here in Australia had firmed.

“After Monday’s sharp US market declines – now in the process of spinning around global markets in Tuesday’s sessions – the case for large synchronised global rate cuts seems strong. Indeed, the case for large synchronised global rate cuts is stronger than ever before, and little else seems available at present to slow the “adverse feedback loop” threatening to stall the global economy, or worse.

“Whether synchronised global rate cuts will happen or not, I do not know. On the positive side, one suspects that the ECB, the BOE and other central banks now have, like Dallas Fed President Fisher, come belatedly to the conclusion that “inflation” no longer is the main threat to their economy’s long-run health.”

“there’s obviously an increased chance that the RBA’s 7 October cut now will be 50bp (to 6.5%) rather than just 25bp. The case for the larger 50bp RBA cut simply is that the outlook for local and global growth continues to darken – and (so) the outlook for lower inflation continues to brighten – as the global credit crunch intensifies.”

Figures from the Reserve Bank showed a further slowing in private credit in August as activity continued to ease in the economy and demand for credit slumped.

The bank said that total private sector credit rose by 0.5% over August following a rise of 0.6% over July. Over the year to August, total credit rose by 10.5%.

Growth in credit for housing slowed again to 0.4% in the month and 9.4% over the year to August, (both investor and owner occupied fell). Personal credit fell for a third month in a row: down 0.4% vs. 0.7% in July. The reason was another fall in margin lending as the slumping stockmarket forced margin calls from lenders to investors. Growth in business credit slowed, rising 0.6% in August (0.9% in July) to be up 13.6% through the year, compared to the 15.3% annual rate the month before.

Australian Bureau of Statistics figures showed retail sales grew 0.3% “in trend terms” in August and the previous three months, but building approvals fell sharply, down 3.7% in the month as demand from owner occupiers and investors fell.

That was after a 2.4% drop in July.

But the impact was worse than it seems from these figures as the ABS said there was a double digit drop in the value of building approved with investor housing approvals down more than 20% and the value of renovations off sharply as well.

“The seasonally adjusted estimate for the value of total building approved fell 12.6% in August. The seasonally adjusted estimate for the value of new residential building approved fell 1.6% in August. The seasonally adjusted estimate for the value of alterations and additions fell 12.4%, and the value of non-residential building fell 23.8%.”

Just before midday the Commonwealth Bank was down $1.79, or 4.01% to $42.08, Westpac $1.15, or 5% to $22.00, the National Australia Bank $1.49, or 5.8% to $24.20, while the ANZ Banking Group shed 77 cents or 4.1%, to $18.02. These levels were up a touch from the lows hit in the first half hour to 45 minutes of selling.

Westpac merger target St George Bank fell 4.92% to $22.00. Macquarie Group slumped $3.62 or 9.73% to $33.58, and Babcock & Brown lost 48 cents or 20.43% to $1.87.

BHP Billiton off $2.42 or 7.07% to $31.82 after falling under the $31 mark while Rio Tinto down $8.09, or 8.47% to $87.41 after hitting $86 at one stage in early trading.