* 2008 one of the worst on record, investors eye more government aid
* More layoffs, bad loans, bankruptcies seen in near term
* Business activity continues to shrink
* Paulson says U.S. lacked tools to tackle financial crisis (For stories on the financial crisis, click on [nCRISIS]
By Kim Coghill
SINGAPORE, Dec 31 (Reuters) - Investors said good riddance on Wednesday to one of the worst years on record and prayed that massive government rescue plans will pull the global economy out of its fierce tailspin later in the new year.
But more pain is expected in the near-term as bleak economic reports roll in, signalling more bankruptcies, bad debts and layoffs through at least early 2009, and more sleepless nights for everyone from central bankers to consumers struggling to pay off mortgages and credit card bills.
The biggest financial crisis in 80 years, sparked by the meltdown of the risky U.S. subprime mortgage market, made this year one of the worst ever for investors as recession stalked the global economy.
"It has been a shocking year, hardly anything was spared in the market carnage," said Michael Heffernan, senior client adviser and strategist at Austock Group in Australia.
European shares looked set to end the year with a 45 percent loss, their biggest ever annual drop and roughly in line with gut-churning declines on other major global markets.
The slump wiped out nearly $14 trillion in market value, according to the benchmark MSCI world index of larger companies.
For all markets, the damage was probably much worse. The World Federation of Exchanges, which tracks stock markets in 53 developed and emerging economies, said some $30 trillion in market value evaporated through end November.
The crisis also radically changed the landscape of global finance, bringing down big U.S. investment banks Bear Stearns and Lehman Brothers, saddling many other international banks with huge losses and crippling the credit system that keeps the world economy humming.
The U.S. S&P 500 benchmark has lost about 40 percent with just one trading day left in 2008. Its biggest yearly drop was in 1931 during the Great Depression, when it fell 47.1 percent.
No sector has been spared from global banks to autos to resources, and even corner stores.
Victims of the crisis are still piling up, with announcements almost daily of fresh company losses, more layoffs, and slumping prices for assets from cars to homes.
Gold was one of the few commodities to end the year higher, gaining about 4 percent, as panicky investors fled stock markets for assets which are seen as safer during times of trouble.
MORE BAD NEWS
Tuesday brought more dismal economic news in the United States, with single-family home prices down 18 percent in October from a year earlier and consumer confidence plunging to a record low due to severe job cuts. [ID:nN30339924]
"We are not going to be seeing anything fundamentally positive from the U.S. for the time being," said Michael Woolfolk, senior currency strategist at Bank of New York Mellon.
But with central banks cutting interest rates to spur growth, declining oil prices and governments pumping money into the system, Heffernan said there were some positive signs for 2009.
"The blood has been drained and we are now getting a transfusion."
World governments have pumped more than $1 trillion into their economies to keep business afloat and save jobs, and more aid is expected in 2009 as leaders battle to stave off an even deeper and possibly longer recession.
Global credit markets are showing some signs of improvement, but banks remain reluctant to lend to businesses and consumers, fearing a rash of bad loans as economies worsen.
Government stimulus plans, corporate bailouts and rate cuts also take time to be felt, and their full benefits are still being hotly debated by analysts and economists. Global growth, if any, could be very weak in 2009 as a whole even if consumers are coaxed to start spending again, which is key to recovery.
The Indonesian government may announce more fiscal plans on Wednesday to help Southeast Asia's biggest economy withstand the global economic slump.
Indonesia's economy is still expanding, but growth may drop below the 6 percent pace analysts say the country needs to prevent unemployment from rising among its 226 million people.
Mounting job losses are raising fears of social unrest in some countries, and piling pressure on governments to act quickly, even if it means huge deficits and debts that will have to be paid off somehow in the future.
Investors are now looking to January, which will bring a new U.S. administration when Barack Obama is sworn in as president on Jan. 20. He is expected to unveil a government spending programme which sources say could range from $675 billion to $775 billion over two years.
The new year will also mark attempts by global policymakers to overhaul outdated regulatory systems to head off future crises and give them more power to oversee increasingly complex financial products such as derivatives, which have complicated efforts to fix the latest financial mess. Outgoing U.S. Treasury Secretary Hank Paulson said the U.S. government had to battle the financial crisis without the tools needed to do the job effectively, the Financial Times newspaper reported on Wednesday.
In one of his last interviews before leaving office, Paulson said, "We've done all this without all of the authorities that a major nation like the U.S. needs."
He said even after Congress in October approved the $700 billion troubled asset relief program, Washington still lacked tools such as an adequate special bankruptcy regime for non-bank financial firms.
"We're dealing with something that is really historic and we haven't had a playbook," he said. (Reporting by Reuters bureaux worldwide; Editing by Tomasz Janowski)