New York, Nov. 12 (Reuters): The US treasury backed away from using a $700-billion bailout fund to cleanse bank balance sheets of toxic mortgage debt, while Europe reported more gloomy economic news and the World Bank warned that international trade might contract in 2009.

US treasury secretary Henry Paulson, in the most explicit sign yet that the treasury was abandoning its initial plan for the rescue funds, said on Wednesday he preferred a second round of capital injections into financial companies to help them weather the worst market crisis in 80 years.

“Our assessment at this time is that this (the purchase of toxic assets) is not the most effective way to use funds,” Paulson told a news conference.

That added to worries sparked by gloomy economic data from Britain and the eurozone, suggesting the world economy was headed for recession and another round of interest rate cuts.

“We are certainly prepared to cut ... again, if that proves to be necessary,” Bank of England governor Mervyn King told a news conference after forecasting slower British growth and minimal inflation in 2009.

Asian and European stocks fell, while Wall Street dropped 3 per cent, dragged down at the opening by electronics chain Best Buy’s move to cut its full-year outlook. Oil prices slid further below $60 a barrel.

Rescue efforts at risk

Elsewhere, some efforts to cure both national economies and companies ailing from the credit crisis looked like they were in danger on Wednesday.

The International Monetary Fund withheld official backing for a $6-billion bailout plan for Iceland, the Financial Times reported, putting loans to the North Atlantic country at risk.

Some of British bank Barclays' biggest shareholders have threatened to vote against a plan to raise £7 billion ($10.8 billion) of capital unless it improves the terms of the deal, British newspapers reported.

Meanwhile, Dutch group ING suffered its first-ever quarterly loss because of impairments on stocks and bonds, counter-party losses and property writedowns.