Nov. 14 (Bloomberg) -- Money-market rates in dollars rose in London after Europe sank into its first recession in 15 years, stoking concern world leaders will struggle to fix a financial crisis that's paralyzing lending by banks.

The London interbank offered rate, or Libor, that banks say they charge each other for three-month loans climbed for a second day. U.S. Treasury Secretary Henry Paulson said two days ago he plans to use the second half of the government's $700 billion financial-rescue program to help relieve pressures on consumer credit, scrapping an effort to buy devalued mortgage assets. Group of 20 heads of state start a two-day meeting today on the crisis.

Fifteen months of frozen credit markets are battering the world's biggest economies, raising the prospect of a further squeeze in bank lending. Gross domestic product in the 15 euro nations shrank 0.2 percent in the third quarter from the previous three months, when it also contracted, the European Union said today. The number of Americans collecting jobless benefits jumped to a 25-year high, the Labor Department said yesterday.

Paulson's announcement ``spooked the banks,'' said Christoph Rieger, a fixed-income strategist in Frankfurt at Dresdner Kleinwort. ``It's likely they are going to get a cut in capital injection. And we have flows of negative news on the economic front.''

President George W. Bush invited the G-20 leaders to Washington for their first ever summit in response to calls from French President Nicolas Sarkozy and U.K. Prime Minister Gordon Brown for a discussion of the causes and possible cures of the financial crisis. The Organization for Economic Cooperation and Development predicted the economies in its bloc of 30 rich nations would contract next year by 0.3 percent.

`Manufacturing Freefall'

The German economy, Europe's largest, shrank by a more-than- expected 0.5 percent in the third quarter, confirming it entered its worst recession in at least 12 years, the government said yesterday. Ireland and Italy also slipped into recession this year and Spain's economy contracted in the third quarter for the first time in 15 years. Growth in the Netherlands and Portugal stagnated.

``With manufacturing activity in a freefall, services hit hard by the credit crisis and construction activity starting to contract, future growth prospects appear gloomy,'' said Aurelio Maccario, chief euro-region economist at Unicredit MIB in Milan.

Financial firms worldwide have axed more than 155,000 jobs since the global credit crisis began last year, according to data compiled by Bloomberg. They've taken $950 billion in writedowns and losses since the start of 2007.

Libor-OIS Widens

The three-month Libor for euros declined 1 basis point to 4.22 percent, the smallest drop since Oct. 27, BBA data showed.

``There's general concern the economic crisis might be worse than expected and that will further hurt banks,'' said Jan Misch, a money-market trader at Landesbank Baden-Wuerttemberg in Stuttgart. ``Still, this is just a blip. If stocks are holding up, and there are no further bank failures, rates should come down.''

In Asia, the Hong Kong three-month interbank offered rate, or Hibor, rose 5 basis points to 2.19 percent, climbing for the second day. Singapore's three-month rate for U.S. dollar loans, Sibor, increased for the first time since Oct. 13, advancing 11 basis points to 2.23 percent.

Libor, the benchmark for $360 trillion of financial products worldwide, is set by a panel of banks in a daily survey by the British Bankers' Association before noon in London. Members provide estimates on how much it would cost to borrow in 10 currencies for terms ranging from one day to a year.

The Libor-OIS spread, a gauge for determining when markets have returned to normal, widened 10 basis points to 170 basis points today. The spread measures the difference between the rate banks charge for three-month dollar loans relative to the overnight indexed swap rate.

That compares with 87 basis points on the last trading day before Lehman Brothers Holdings Inc. went bankrupt on Sept. 15, and an average of 11 basis points in the five years before the crisis started.

The TED spread, which measures the difference between what the U.S. government and banks pay for three-month loans, widened 9 basis points to 206 basis points.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

Last Updated: November 14, 2008 09:22 EST