By Matt Spetalnick and Caren Bohan

up a rescue that will jolt the world's biggest economy back to life and contain the financial crisis ravaging global markets.

The first African-American to become U.S. president will take his oath against the backdrop of plunging world stock markets, prospects of a drawn-out U.S. and global downturn, a trillion dollar federal deficit and fears of more crippling bank losses.

Underscoring the dire state of the world economy, Japan reported consumer confidence plunged to a record low last month in yet another sign of deepening recession.

Asian stock markets dropped sharply on Tuesday in the wake of European losses after Britain's multi-billion-pound bank rescue unveiled on Monday failed to assure investors and main markets in Europe were expected to keep falling.

"For the next two to three months, hopes for economic steps by Barack Obama will surface from time to time," said Yoshinori Nagano, chief strategist at Daiwa Asset Management. "But once equity markets recover some ground on those hopes, they are bound to face grim reality again."

Obama's team has vowed to make its bailout funds work harder to get credit flowing again to cash-starved consumers and companies and is expected to announce soon changes to the second half of Washington's $700 billion bank rescue scheme.

The incoming president is also working with lawmakers to launch a two-year $825 billion fiscal stimulus plan by mid-February. In one of the most eagerly awaited inaugural addresses, Obama is expected to reassure Americans that the country can rebound from hard times.

Governments around the world have committed trillions of dollars to fiscal stimulus packages and bank rescues in response to the crisis that has spiraled from a U.S. housing slump and pushed the world into its worst downturn in decades and many firms deep into the red.

Britain's multi-billion-pound bank rescue announced on Monday was the second since October and came as Royal Bank of Scotland said it was on course to report a 28 billion pound loss for 2008 -- the biggest in UK corporate history.

After modest gains early this month, investors pulled back again, battered by grim economic data and news of corporate losses and job cuts as the fourth-quarter reporting season gets under way.

ECONOMIC GLOOM DEEPENS

Economic figures due later this week and news of corporate shake-ups and downsizing are only likely to deepen the gloom.

The Japanese government said on Tuesday its consumer confidence index hit the lowest level since the survey began in 1982.

December trade data due on Thursday is expected to show a record 30 percent fall in exports from a year earlier, a sign that even industrial powerhouses such as Toyota Motor Co are struggling with rapidly dwindling global demand.

The world's top carmaker on Tuesday named Akio Toyoda, the grandson of the company's founder, to head the company and lead it through the crisis as it heads for its first-ever annual consolidated operating loss.

Britain is set to confirm on Friday the world's fifth-largest economy is now in its first recession since 1992.

China, the world's main growth engine, on Tuesday reported its first rise in urban unemployment in five years as its economy slows sharply from heady double-digit growth rates of the past five years.

China is expected to show this week that its economy expanded in the final quarter of 2008 at its weakest rate in nearly a decade.

Asian shares retreated about 2.7 percent and U.S. stocks futures fell about 1.5 percent heralding a tough day ahead when Wall Street reopens after the Martin Luther King Jr Day on Monday.

"There could be some positive psychological effect on the market about Obama's economic policy," said Tony Tong, analyst with China Everbright Securities in Hong Kong. "But the implementation will take time and its impact on the economy may take (even) longer."

Commentators have pointed out that the public expects Obama to achieve so much that he looks doomed to disappoint no matter what he does.

"The expectations for the Obama administration are off the charts," said Willian Keylor, a history professor at Boston University. "Whatever he accomplishes will be below the extraordinary expectations that people have for him.

Markets worry not only that bank rescues and government pump-priming will take time, but are also increasingly aware that those extraordinary actions to stem the financial wildfire come at a steep price, such as ballooning fiscal deficits.

Monday's downgrade in Spain's credit rating by Standard & Poor's drove that message home, hitting the euro as investors feared other government in the euro zone could experience the same fate as they spend heavily to refloat their economies.

(Reporting by Reuters bureaus worldwide, Writing by Tomasz Janowski; Editing by Neil Fullick)