EU leaders tell Britain to exit swiftly, market rout halts

By Michael Holden and Elizabeth Piper

LONDON/BRUSSELS (Reuters) - European leaders told Britain on Tuesday to act quickly to resolve the political and economic chaos unleashed by its vote to leave the European Union, a move the IMF said could put pressure on global growth.

Financial markets recovered slightly after the result of Thursday's referendum wiped a record $3 trillion off global shares and sterling fell to its lowest level in 31 years against the dollar, but trading was volatile and policymakers said they would take all necessary measures to protect their economies.

British Finance Minister George Osborne, whose attempt to calm markets had fallen on deaf ears on Monday, said the country would have to cut spending and raise taxes to stabilise the economy after a third credit ratings agency downgraded its debt.

Firms have announced hiring freezes and possible job cuts, despite voters' hopes the economy would thrive outside the EU.

European countries are concerned about the impact of the uncertainty created by Britain's vote to leave on the 27 other EU member states. There is little idea of when, or even if, the country will formally declare it is quitting.

"The process for the United Kingdom to leave the European Union must start as soon as possible," French President Francois Hollande said. "I can't imagine any British government would not respect the choice of its own people."

European Commission President Jean-Claude Juncker sent a similar message as he prepared for talks with British Prime Minister David Cameron before an EU summit in Brussels, although he did not expect an immediate move.

"We cannot be embroiled in lasting uncertainty," Juncker told the European Parliament, which he interrupted to ask British members of the assembly who campaigned to leave the EU why they were there.

Cameron, who called the referendum and tendered his resignation when it became clear he had failed to persuade Britain to stay in the EU, says he will let his successor declare the country's exit formally.

His Conservative Party has been split for years into pro- and anti-EU camps and the opposition Labour Party sank deeper into chaos on Tuesday.

Labour lawmakers passed a vote of no-confidence in party leader Jeremy Corbyn, accusing him of failing to win over traditional supporters during the referendum campaign. The lawmakers fear a similar failure at the next general election, due in 2020, will lead to Labour suffering a near wipe out.

However, the confidence vote does not automatically trigger a leadership election and Corbyn refused to quit. "I was democratically elected leader of our party for a new kind of politics by 60 percent of Labour members and supporters, and I will not betray them by resigning," he said.

NO CHERRY-PICKING

Arriving for the EU summit, Cameron said: "I'll be explaining that Britain will be leaving the European Union but I want that process to be as constructive as possible, and I hope the outcome can be as constructive as possible."

His party says it aims to choose a new leader by early September. But those who campaigned for Britain's leave vote have made clear they hope to negotiate a new deal for the country with the EU before triggering the formal exit process. European leaders have said that is not an option.

"No notification, no negotiation," Juncker said.

After Cameron has addressed EU leaders on Tuesday evening, they will meet the next day to discuss Brexit without him.

Leave campaigners in Britain including Boris Johnson, a likely contender to replace Cameron, suggest the country can keep access to the European single market and curb immigration -- but those goals are mutually incompatible under EU rules.

German Chancellor Angela Merkel said Britain would not be able to "cherry-pick" parts of the EU, such as access to the single market, without accepting principles such as freedom of movement when it negotiates its exit from the bloc.

"I can only advise our British friends not to fool themselves ... in terms of the necessary decisions that need to be made in Britain," she told parliament in Berlin.

The European Parliament jeered when Nigel Farage, the leader of Britain's eurosceptic UKIP party, said in a scathing speech that Europe had deceived its population and Britain would be its "best friend" if it agreed to extend a tariff-free trade deal.

Germany's financial market regulator delivered a double blow to the City of London, saying it could not host the headquarters of a planned European stock exchange giant after Britain leaves the EU, and could not remain a centre for trading in euros.

Fitch joined other credit ratings agencies in downgrading its sovereign debt on Monday, and Osborne said Britain faces tax rises and spending cuts.

"We are going to have to show the country and the world that the government can live within its means," Osborne, who campaigned to stay in the EU, told BBC radio.

Business leaders and investors sent mixed messages. Virgin boss Richard Branson said his airline-to-finance group had cancelled a "very big" deal since the referendum which would have involved about 3,000 jobs.

He also told the Guardian newspaper some Chinese businesses were now reconsidering their business strategy in Britain.

However, business minister Sajid Javid said Chinese technology firm Huawei [HWT.UL] had confirmed a 1.3 billion pound ($1.7 billion) investment in Britain would go ahead as planned.

MORE AUTONOMY FOR LONDON

The 52-48 percent referendum vote has deepened geographical as well as political and social divisions in the United Kingdom.

Sadiq Khan, the mayor of London, where a majority voted to stay and people fear job losses if the city declines as a global financial centre, said access to Europe's market was vital. "On behalf of all Londoners, I am demanding more autonomy for the capital - right now," he said.

Scotland, where people also voted strongly to remain in Europe, is weighing a possible second referendum on leaving the United Kingdom given the vote to leave the EU.

Scottish leader Nicola Sturgeon denounced what she called a vacuum of leadership in London and said three months of political drift until a successor to Cameron is in place would further damage Britain's economy. She said she would meet EU leaders on Wednesday to discuss how Scotland could remain.

The impact looked likely to spread far beyond Britain's borders although European shares rose after a heavy sell-off, partly due to hopes of a more co-ordinated central bank response to financial market losses. Sterling also rose and Wall Street opened higher as investors hunted for bargains.

European Central Bank President Mario Draghi said central banks around the world should aim to align monetary policies to mitigate "destabilising spillovers" between economies.

An EU official later said Draghi had told the summit there was a risk people outside Europe may begin to view the bloc as ungovernable and governments had to address such fears.

Draghi had added that he agreed with private economists who predict euro zone growth will be reduced by up to 0.5 percent cumulatively over the next three years due to the Brexit vote.

Shares in European banks have come under particular pressure, especially those based in Britain, over doubts about future market access, and Italy, with high levels of bad loans.

Brexit creates huge political uncertainty and will put pressure on global growth, the International Monetary Fund (IMF)'s Deputy Managing Director Zhu Min said on Tuesday at the World Economic Forum in Tianjin in northern China.

Dutch Prime Minister Mark Rutte said England had collapsed "politically, monetarily, constitutionally and economically".

U.S. President Barack Obama told National Public Radio there had been some hysteria "as if somehow NATO's gone, the trans-Atlantic alliance is dissolving, and every country is rushing off to its own corner. That's not what's happening."

(Additional reporting by Alastair Macdonald, Paul Taylor, Gabriela Baczynska, Phil Blenkinsop and Jan-Robert Bartunek in BRUSSELS, Sudip Kar-Gupta and Guy Faulconbridge in LONDON and Alistair Scrutton in STOCKHOLM, writing by Philippa Fletcher and David Stamp, editing by Anna Willard and Timothy Heritage)