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UBS was in turmoil as ratings agencies warned lax risk management could prompt downgrades and senior executives canceled engagements to meet financial regulators.

Adoboli, 31, worked as a director of exchange traded funds at UBS. He will appear at City of London Magistrates court later on Friday, police said.

UK law firm Kingsley Napley has been hired to represent Adoboli. The firm also advised rogue trader Nick Leeson, whose $1.4 billion derivatives losses triggered the collapse of Britain's Barings Bank in 1995.

Most market speculation has centered on the possibility that the UBS loss resulted from the shock decision by the Swiss central bank last week to impose a cap on the red-hot franc, sending the currency plunging and Swiss shares sharply up.

A UBS spokesman would only say that the losses were made in equities.

One UBS trader in London said staff were expecting news of more job cuts in the next two weeks as well as zero bonuses.

"In my team people are scared and are playing low profile. The idea is to stay there and keep your job. In the current situation, it would be difficult to find another job anywhere else," the person told Reuters on condition of anonymity.

Britain's Financial Services Authority and Switzerland's FINMA markets regulator were both in close contact with the bank, spokesmen said.

A senior UBS banker said regular meetings and social events involving senior management had been canceled, which he presumed was because of crisis management or meetings with regulators.

"Morale is dreadful... It's very damaging to our reputation. Equities is one of the businesses where we thought we had got it right," the banker said.

MASSIVE OVERHAUL

Analysts said the massive loss, announced on Thursday, was the final nail in the coffin for UBS' investment bank which has struggled, like others in the industry, against falling markets and tough new regulation as well as the soaring Swiss franc.

Reputational damage from the scandal will force a restructuring many had already thought inevitable and analysts and insiders expect UBS may now have to move before November 17, when it was expected to make the announcement at an investors' day in New York.

"I wouldn't be surprised if we got a preliminary confirmation of a major scaleback soon, even this weekend. The announcement can't wait until Q3 results or the investor day," said Matthew Czepliewicz, an analyst at Collins Stewart.

Switzerland's two biggest political parties, the Swiss People's Party and the Social Democrats, want UBS to split investment banking from its wealth management arm and pressure for it to take radical action is likely to mount in the wake of the scandal.

Ratings agencies Standard & Poor's and Moody's put the bank's credit rating on negative watch, while Fitch said it had put UBS's viability rating on negative watch.

Fitch said the incident "strengthens the arguments for UBS to down-scale its investment banking unit" while S&P added: "UBS is currently undertaking a strategic review of the size and shape of the investment bank division and we consider that the trading loss may influence the outcome of this process."

HISTORY OF MISHAPS

UBS had started to see client confidence return this year after it had to be rescued by the Swiss state in 2008 following massive losses on toxic assets held by its investment bank. The bank has had a history of major risk management glitches.

The $2 billion that UBS said had been lost effectively canceled out the first year of savings from a recently-announced cost-cutting plan involving the loss of 3,500 jobs.

"We believe that yesterday's event could have personnel consequences on senior management level," said Vontobel analyst Teresa Nielsen. "The exit from non-core businesses inside the investment bank could be accelerated."

In the firing line are Chief Executive Oswald Gruebel, himself a former trader who was brought out of retirement in 2009 to try to turn UBS around, and investment bank boss Carsten Kengeter, the bank's highest paid employee last year.

UBS stock, which fell 10.8 percent on Thursday to end at its lowest close since March 2009, was up 5.6 percent at 10.3 francs by 1340 GMT compared with a 2.7 percent rise on the European banking sector index.

New losses in UBS's investment bank risk scaring rich clients and prompting a further flight from its huge private bank, the core of its business that used to be the world's biggest wealth manager but has slipped to third place.

"The concern from the wealth management client's point of view is that if UBS cannot even manage their own proprietary trading positions, how can the client expect UBS to manage money on his or her behalf," said Melvyn Teo, professor of finance at Singapore Management University.

The suspect's father, John Adoboli, a retired United Nations employee from Ghana, said he knew finance was a high risk area but he had no doubts about his son's integrity.

"From what the reports are saying, it could be that he made a mistake or wrongful judgment," he told Reuters by phone from the Ghanaian port city of Tema.

($1 = 0.870 franc)

(Additional reporting by Steve Slater, Sophie Sassard, Sarah White and Huw Jones in London, Kwasi Kpodo in Accra and Kevin Lim in Singapore; Editing by Sophie Walker)

Treasury Secretary Timothy Geithner was holding talks with European Union finance ministers on Friday on the possibility of leveraging the euro zone's bailout fund to help resolve the debt crisis.

At 9;55 a.m. ET, Thomson Reuters/University of Michigan Surveys of Consumers will release preliminary September consumer sentiment index. Economists expected a reading of 56.5 compared with 55.7 in the final August report.

Franco-Dutch airline Air France-KLM (AIRF.PA) said it planned to order 50 long-haul jetliners from Airbus (EAD.PA) and Boeing (BA.N) in a deal worth around $12 billion at list prices.

The Treasury Department will release net capital flows and foreign Treasury purchases for July at 1300 GMT. In June, net capital inflows were $3.7 billion, foreign net sales of U.S. Treasuries were $4.5 billion.

Private equity firm Silver Lake is considering a bid for internet company Yahoo Inc (YHOO.O), according to reports on Thursday.

Economic Cycle Research Institute (ECRI) releases at 1430 GMT its weekly index of economic activity for September 9. In the prior week the index read 123.0.

The Federal Reserve issues at 1600 GMT Flow of Funds Accounts of United States for the second quarter of 2011.

U.S. shares of Research In Motion (RIMM.O) were down 10 percent after the bell on Thursday as the company reported a steep drop in quarterly profit on limp sales of its smartphones and tablets.

European shares rose in early trade on Friday, adding to gains following central bank action on Thursday to boost liquidity. The FTSEurofirst 300 .FTEU3 index of top European shares was up 0.3 percent. Japan's Nikkei average .N225 closed 2.3 percent stronger.

The Dow Jones industrial average .DJI was up 186.45 points, or 1.66 percent, at 11,433.18. The Standard & Poor's 500 Index .SPX was up 20.43 points, or 1.72 percent, at 1,209.11. The Nasdaq Composite Index .IXIC was up 34.52 points, or 1.34 percent, at 2,607.07.

(Reporting by Atul Prakash; Editing by Dan Lalor)

Coordinated central bank action around the world to boost liquidity for European banks, at a time when some institutions have been shut out of short-term lending markets, has raised speculation that policymakers may take bold steps to hold the euro zone together.

Equity markets in Asia rallied taking heart from the S&P 500 .SPX closing above the 1200 level, which had proved to be a stiff resistance over the past two weeks.

Japan's Nikkei was up 1.8 percent, climbing above a steep trendline formed off intra-day highs in August and September.

"With today's rise, it is like we are cautiously climbing up a wall but at the same time we're thinking that the wall may collapse if we go up any further," said Kenichi Hirano, a strategist at Tachibana Securities.

Profit-taking ahead of a long weekend in Japan could see some of the gains fade in the afternoon session.

The benchmark MSCI index of Asia Pacific stocks outside Japan rose 2.3 percent .MIAPJ0000PUS, with gains mostly spread between technology and commodity-related shares.

The index has rebounded more than 4 percent from a 14-month low hit on Wednesday.

While stocks across Asia rallied, volumes remained light and were significantly below levels seen during the selloffs over the past six weeks.

"It certainly doesn't feel like a rally, but then again, that's what melt-ups are all about," said Todd Martin, Asia equity strategist at Societe Generale in Hong Kong, in a note to clients.

In Hong Kong, shares of European retailer Esprit Holdings (0330.HK) fell more than 32 percent - the worst two-day drop since October 1997 - after disappointing first-half results on Thursday.

ASIA FX

Weakness in Asian currencies as foreign investors offloaded on regional bets and thin equity volumes, however, suggest investors remain skeptical that the debt crisis can be solved by providing temporary emergency funds for banks.

"Obviously it's not a long-term solution, we need to see some resolution to the sovereign debt issue to give market confidence we'll have stronger growth over the medium-term," said Spiros Papadopoulos, a senior market economist at National Australia Bank.

"Certainly these policy measures will help improve confidence in the short-term," he added.

This week has seen hedge funds of all stripes and mutual funds selling Asian currencies at a rapid pace and the move continued on Friday in spite of the stable euro.

The euro slipped 0.2 percent to $1.3850 though was actually up 2.1 percent on the week, with the swift move up through $1.3750 making traders nervous about opening bets against the currency ahead of the ECOFIN meeting and with the next Federal Reserve meeting on Sept 20-21.

The weakness in Asian currencies has spilled over to the Australian dollar because of the antipodean currency's use as a play on investor risk-taking.

The Australian dollar was down 0.1 percent to $1.0321 and has fallen a percent this week.

Spot gold prices slid 1 percent to $1,772.75 an ounce, on course for the biggest weekly decline since January 2009.

The combination of resilient equities, a rebound in the euro and a bearish double-top chart pattern in gold have combined to cast a shadow on the safe-haven asset.

(Additional reporting by Ayai Tomisawa in TOKYO and Cecile Lefort in SYDNEY; Editing by Kavita Chandran)

The disclosure came as the European Central Bank said on Thursday it was joining with other major central banks in a joint action coordinated with the U.S. Federal Reserve to ease dollar funding for stricken European banks to tackle an emerging credit crunch due to the sovereign debt crisis.

Geithner will hold talks with EU ministers in Poland on Friday and will propose that the European Financial Stability Fund, the 440 billion euro fund set up in May 2010, be used in a similar way to an emergency loan fund created by the U.S. Treasury and the Fed in 2008 to thaw frozen credit markets, sources said.

"Geithner will probably insist on the importance of leverage to have more funds to ringfence the big Europeans, Italy and Spain, and to find a solution for Greece," one EU official told Reuters ahead of the meeting in Wroclaw, Poland.

The U.S. emergency fund served to support U.S. lenders in the 2007-2009 crisis. Responding to signs of similar stress rising in Europe now, the ECB and the central banks of Britain, Japan and Switzerland agreed on Thursday to reintroduce three-month dollar liquidity operations in the fourth quarter.

The news sharply boosted European bank shares and the euro, with shares in French bank BNP Paribas jumping as much as 13 percent. U.S. bank shares also rose, helping Wall Street close higher.

International Monetary Fund chief Christine Lagarde said the joint move was "exactly what is needed" since the world has entered a dangerous phase of the crisis, and repeated her call for European countries to recapitalize their banks.

U.S. financial regulators, led by the Treasury and the Fed, held a conference call on Thursday to discuss the latest global market developments, a Treasury official said, without elaborating.

Bank of France Governor Christian Noyer said all European banks, not just French ones, would have to adjust their business models and shrink their balance sheets because U.S. money market funds were "withdrawing from Europe.

Geithner is expected to expound the model of the Term Asset-Backed Securities Loan Facility (TALF) that U.S. financial authorities used to jump-start the asset-backed securities market, which was frozen at the time and stalling an economic recovery.

Under TALF, the Treasury offered up to $20 billion in credit protection to the New York Federal Reserve Bank, where Geithner was then president, allowing it lend up to $200 billion. In return, the New York Fed took in asset-backed securities as collateral with a haircut.

TALF was credited with restarting frozen U.S. markets for securities backed by car, student and small business loans and leases. By taking in paper that had no other buyers at the time, the Fed acted as market maker. No losses were reported on the program.

While it remains unclear whether the same mechanism could be used to leverage Europe's bailout funds, one analyst said EFSF money could be used to guarantee a portion of potential losses on euro zone sovereign debt bought by the ECB, providing more purchasing clout than if it just bought the bonds in the secondary market with money on hand.

"It is possible to leverage the EFSF so as to expand its headline capacity to support sovereign bonds, for example through the use of partial guarantees against first losses," said Sony Kapoor, managing director of think tank Re-Define.

One difficulty is that leveraging a fund that is underwritten by guarantees from euro zone member states could increase liabilities across the board, putting pressure on the triple-A credit rating of countries such as France.

ANOTHER NO FOR EURO BONDS

Leveraging the EFSF would be a radical new approach in the crisis at a time when financial markets are fixated on the possibility of the euro zone introducing jointly issued bonds, even though such a move is strongly opposed by Germany and unlikely to happen any time soon.

German Chancellor Angela Merkel again bluntly rejected such bonds as a solution to the crisis on Thursday, saying that "collectivizing debts" would not solve the problem.

"In order to bring about common interest rates, you need similar competitiveness levels, similar budget situations. You don't get them by collectivizing debts," she said.

The European Union's top economic official meanwhile said he expected international lenders to be able to recommend by the end of the month releasing a vital next tranche of aid to Greece, warding off the threat of an imminent default.

While that may keep Greece afloat until it gets a second bailout package from the euro zone, the finance minister said the country would remain mired in recession through 2012, the fourth year in a row, a contraction that is only likely to fuel popular outrage at the austerity drive.

Lagarde was more cautious on Greece's progress, saying Athens had partially implemented reforms under its EU/IMF bailout program but must make more progress to secure release of the next 8 million euros in emergency loans.

"If there has been no implementation, we don't pay," she warned.

On a conference call with Greek Prime Minister George Papandreou on Wednesday, Merkel and French President Nicolas Sarkozy voiced their support for keeping Greece in the euro zone and continuing financial assistance provided it sticks strictly to austerity measures to meet its fiscal targets.

EU Economic and Monetary Affairs Commissioner Olli Rehn said he now expected an EU/ECB/IMF "troika" of inspectors to complete their review of Greece's fiscal targets by the end of the month.

(Additional reporting by David Lawder in Washington; Writing by Luke Baker and Paul Taylor; Editing by Janet McBride/Patrick Graham/Ron Askew/Leslie Adler/Diane Craft)