IMPEACH BUSH

SYDNEY/TOKYO (Reuters) - Australia stunned markets with its steepest interest cut in 16 years Tuesday and investors expected that other central banks would follow suit in a coordinated move to combat the global credit crisis.

The Bank of Japan, alone among the biggest central banks, signaled it may not join a campaign of rate cuts to contain a crisis that has put the world's financial system in greater peril than at any time since the 1930s Great Depression.

That did nothing to silence the clamor. Influential investor Bill Gross, who runs the world's biggest bond fund, urged the U.S. Federal Reserve to follow Australia's lead and slash rates by a full percentage point now the inflation threat has receded.

"We are experiencing asset deflation and the threat of headline inflation is long past," Gross, chief investment officer of U.S.-based Pacific Investment Management Co., said in a note that called for a "globally coordinated policy rate cut."

Indeed, Citi analysts said the banking crisis, falling asset prices and volatile markets may provide the justification for emergency rate cuts by the European Central Bank (ECB) and the Bank of England (BoE) in coming hours.

"There seems a growing chance of emergency ECB and BoE easing in the next few days, perhaps even today -- especially if the U.S. Fed is also ready to move," they said in a research note.

The Reserve Bank of Australia's 100 basis point reduction was twice as big as expected, underscoring the increasingly strong medicine needed to jolt the world's financial markets back to health.

"It looks to me that the RBA's rate cut was no fluke," said Suresh Kumar Ramanathan, head of strategy at CIMB Bank in Kuala Lumpur.

"It means the rest of the global central banks may have had a teleconference to up the rate cut story. Bottomline, it's a strong signal to the market that unified action will come after all," he said.

FED CUT

Investors expect the Bank of England to cut rates at its policy meeting this week and are pricing in cuts from the U.S. Federal Reserve and the European Central Bank.

Fed fund futures have priced in a probability of a 75 basis-point cut by the U.S. central bank this month.

Federal Reserve Bank of Dallas President Richard Fisher, considered an inflation hawk, said capital markets were in "semi-panic."

"What I'm more worried about is how dysfunctional the system has become and what we, as the lender of last resort, need to do to encourage the liquidity to flow," he said.

Australia's central bank Governor Glenn Stevens said the RBA's unusually large rate cut was justified by a severe deterioration in the outlook for global growth, combined with a sharp rise in funding costs for banks.

ECB President Jean-Claude Trichet signaled last week the bank was warming to the idea of lower rates when "contracting domestic demand and tighter financing conditions."

Among the world's largest central banks, the Bank of Japan struck the only discordant note.

"Policy coordination that would involve measures unsuitable for each nation's economic and price conditions would be undesirable," Governor Masaaki Shirakawa said at a news conference after leaving rates on hold at 0.5 percent.

With its interest rates closer to zero than any other central bank in the Group of Seven rich nations, the BOJ could lose room for maneuver by cutting interest rates too early.

Japan's banking system has been largely spared the financial carnage triggered last year by a meltdown in the U.S. mortgage market that is now forcing Washington and European governments to bail out banks or allow them to collapse.

The BOJ has joined the Fed and other central banks in the industrialized world in pouring cash into money markets to prod banks into lending to each other again after a freeze triggered by U.S. bank failures.

MARKET STRAIN

Those operations have done relatively little to bring down the cost of borrowing dollars.

In London three-month dollar and euro funding on the interbank market, which now extends over the illiquid year-end holiday period, remained substantially higher than anticipated official interest rates, a key measure of financial market stress.

At 0740 GMT the interbank cost of borrowing dollars for three months was indicated at 5.29 percent, the upper end of a 3.7 and 5.5 percent range so far in London.

Monday's fixing of three-month London interbank offered rates by the British Bankers Association was 4.28875 percent, and ICAP's three-month dollar New York Funding Rate was 4.6350 percent.

Overnight dollar deposit rates were indicated around 2.5 percent, fairly close to the Federal Reserve's 2 percent target rate. In September after U.S. investment bank Lehman Brothers collapsed, these rates jumped above 10 percent.

(Writing by Simon Rabinovitch: Editing by Dayan Candappa)