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G7 plots economic priorities

WASHINGTON: Finance ministers from the world's richest countries gathered behind police lines on Saturday to plot their economic priorities, hoping a U.S. stock plunge won't hurt global prosperity.

This week's bloodbath on Wall Street shunted aside the usual topic of currency values at top-level meetings here between finance ministers and central bank chiefs from Britain, Canada, France, Germany, Italy, Japan and the United States.

Officials on the sidelines of the talks said there was a belief that the correction this week in U.S. financial markets, which many had seen as dangerously overvalued, may be a good thing if it did not jeopardise the real economy.

Wall Street's three major stock market indices recorded their biggest ever declines in point terms on Friday amid fears that higher U.S. inflation would force steep interest rate rises in the world's biggest economy.

Despite the stocks fall, the United States sees further growth and strong economic fundamentals, while Europe is delighted that its sluggish economic performance of recent years appears to be on the mend.

"Growth prospects in Europe and Germany are extremely positive," Ernst Welteke, the head of the German central bank, told reporters.

While admitting that plunging U.S. stock prices were on the agenda of their bilateral talks, a G7 source said the issue had not so far made an appearance on the communique the G7 will release after its meeting, which adjourns later on Saturday.

The communique would simply say that exchange rates should reflect economic fundamentals and contained no explicit reference to the yen or other currencies, the source said.

U.S. Treasury Secretary Lawrence Summers on Friday declined to comment on the plunge, but said Washington would continue to concentrate on economic fundamentals.

"I'm confident the economy will continue to grow over the next while, with fluctuations from quarter to quarter as always," he said.

European delegates at the G7 and spring meetings of the World Bank and International Monetary Fund shrugged off the U.S. stock fall.

French Finance Minister Laurent Fabius said he did not expect European stock markets to follow U.S. markets lower.

"There's no risk of a crash for the European bourses," Fabius told reporters.

He was also confident about the euro's prospects, which has declined in value against major currencies since its launch last year. "France's position is that currencies must reflect the realities of the economy...there is room for the euro to appreciate and for a yen which is less strong," he said.

WE'RE RELAXED, GERMANS SAY

Welteke also played down concerns about the crash, noting the German stock market capitalisation as a proportion of economic output was far lower than that in the United States.

"We can look at the whole thing in a more relaxed way," he said.

Another issue facing the ministers is how Japan will ensure that its fragile economic recovery is not derailed. The Japanese central bank has hinted it might abandon its policy of zero interest rates. The International Monetary Fund, warning that the economic recovery is not yet guaranteed, says it is too early for such a step.

The G7 meeting takes place in an atmosphere of siege as police close down streets to foil demonstrators complaining at lending policies of the World Bank and International Monetary Fund, which hold semi-annual meetings on Sunday and Monday.

A broad swathe of streets and parks around the White House and the central Washington headquarters of the IMF and World Bank is barricaded off, although President Bill Clinton is travelling in California and not involved in the meetings.

Police are on standby across the city, many of them on bicycle or motorbike.

Police said on Saturday they had arrested three people, bringing the total to 20 arrests since a round of protests started on Monday. They seized literature on how to make Molotov cocktails - crude bombs which could be used in a riot - and closed a warehouse the demonstrators were using as their headquarters.

With more than 10,000 people expected at a protest rally scheduled for Sunday, police are concerned that the situation may deteriorate into the type of riots which disrupted world trade talks in Seattle last year.-Reuters