* Japan approves record budget, business sentiment slumps
* U.S. existing home sales, prices fall at record pace
* Britain downturn deepens, 2009 house price falls seen
* Biden says deal on stimulus plan possible within days
* Trichet says markets underestimate crisis response
By Emily Kaiser and Tomasz Janowski
WASHINGTON/SINGAPORE, Dec 24 (Reuters) - Bleak housing data showed the United States and Britain were sinking deeper into recession and authorities from Washington to Tokyo worked hard to spend their way out of the worst downturn in decades.
Japan's government on Wednesday approved its biggest-ever budget to revive its economy while U.S. President-elect Barack Obama sought to clinch a deal with congressional lawmakers on a massive stimulus package even before the Christmas Day.
"Japan cannot avoid the tsunami of the world recession, but it can try to find a way out," Japanese Prime Minister Taro Aso said announcing the budget.
"The world economy is in a once-in-a-hundred years recession. We need extraordinary measures to deal with an extraordinary situation," he said.
A record drop in U.S. existing home sales and prices last month reported on Tuesday showed the world's biggest economy was on track for what one Federal Reserve official said could be the longest downturn since the World War Two. Housing is at the root of the U.S. slump and the global malaise and economists expect the economy to decline much more in the current quarter after a 0.5 percent contraction in the third quarter. Britain, the world's fifth-largest economy, is in an equally dire shape.
The Royal Institution of Chartered Surveyors said house prices were set to fall by 10 percent next year, confirming the bleak outlook after Tuesday's data showed the economy shrinking by 0.6 percent in the third quarter.
The relentless flow of bad news overshadowed rescue efforts and prompted a warning from European Central Bank President Jean-Claude Trichet that investors could be overlooking the importance of steps already taken by policymakers.
Japan had its share of gloom this week, reporting a record drop in exports -- the mainstay of an economy dogged by weak consumer spending -- and a similarly sharp collapse in business sentiment.
RECORD BUDGET FOR JAPAN
Grim data and warnings from the central bank that the worst may not be over fanned expectations that it will cut its key rate to zero from 0.1 percent and revive a policy of flooding banks with interest free cash it abandoned just two years ago.
Doing its part, Japan's cabinet approved a record 88.5 trillion yen ($980.6 billion) budget for the next fiscal year starting in April. The plan boosts overall spending, excluding debt servicing costs, by 9 percent compared to this year's initial budget and aims to accommodate part of 12 trillion yen in extra spending on government stimulus packages.
In Washington, Barack Obama's team was nearing agreement with congressional Democrats on a huge emergency spending bill intended to jolt the weak U.S. economy and create 3 million jobs over two years, Vice President-elect Joe Biden said on Tuesday.
In recent days, government sources have talked about moving a bill through Congress next month with a price tag in the range of $675 billion to $775 billion over two years.
But rounds of aggressive interest rate cuts, bank bailouts, and massive spending totalling trillions of dollars, have failed to cheer up investors pounded by a daily barrage of news of layoffs, corporate losses and grim economic statistics.
On Tuesday, Spain, Europe's fifth-largest economy, declared it had stumbled into recession and New Zealand data showed it was suffering its worst contraction in eight years.
PRAYER FOR VICTIMS
In a telling sign how bad things have become, Australia's religious leaders saw it necessary to speak up, calling for support for victims of the financial crisis and asking "how the international captains of finance could have got it so wrong".
"We celebrate Christmas this year at a time of economic turbulence throughout the world unknown since the 1930s," said Catholic Archbishop of Sydney Cardinal George Pell.
"This situation is unlikely to improve quickly, even here in Australia, so our first thoughts should be with those who have already lost their jobs," he said.
Markets, resigned to the fact that emergency action may fail to prevent the worst global downturn since the Great Depression, struggled for direction on Wednesday as investors looked forward to the end of a horrid 2008.
Stocks in Sydney and Taiwan rose on the last day before the Christmas holiday but markets in Hong Kong Seoul and Tokyo followed Wall Street lower. Tokyo's Nikkei average lost 2.4 percent as investors dumped Toyota and other auto-related stocks after the world's top carmaker forecast its first-ever annual operating loss.
ECB chief Jean-Claude Trichet said markets were underestimating the impact of central banks' and governments' response to the financial crisis.
"There is an underestimation in the financial sphere of the very great importance of the decisions that were taken," Trichet told said in a speech at a Paris think-tank on Tuesday. (Reporting by Reuters bureaus around the world; Writing by Tomasz Janowski; Editing by Lincoln Feast)