An even more bold plan was set into action late on Thursday with US finance officials and Congressional leaders to create a massive programme to clear away the mountains of bad debt that have weighed down banks and set off the worst financial crisis in decades.

US Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke met with Congressional leaders late on Thursday, vowing to move swiftly amid fears that more banks could go under as the crisis deepens.

Mr Paulson did not give details, stressing any plan would need Congressional approval, but US media reports said he was considering a bailout by taxpayers like that used in the savings and loan crisis of the 1980s and 90s.

The move evoked the creation of the Resolution Trust Corp to clean up US savings and loans after huge losses for those depository institutions in the 1980s, but the form of the new entity was not immediately clear.

'As we've said for some time, the root cause of the stress in the capital markets is the real estate correction,' Mr Paulson told reporters in a brief appearance with Mr Bernanke after the meeting.

In full crisis mode on Friday morning, the US Treasury said it would guarantee US money market funds to stem a run on deposits that could further destabilise the battered financial sector.

A Treasury statement said President George W. Bush approved the use of up to 50 billion dollars (S$71.78 billion) to guarantee for the next year the deposits which are widely held by Americans in mutual funds and brokerages, if the firms pay an insurance fee.

According to the financial industry, US financial firms hold some 3.4 trillion dollars in money market funds, which are generally considered safe investments although they have not up to now been federally guaranteed.

On another front, the US Securities and Exchange Commission said Friday it had temporarily banned the short selling of shares in financial companies in a bid to help crisis-ridden stock markets.

The move covers 799 financial institutions and was made 'to protect the integrity and quality of the securities market and strengthen investor confidence' amid turmoil on world financial markets.

The US measure is due to end on October 2 but could be extended up to 30 days, the SEC said. It was similar to measures undertaken by authorities in Britain, Switzerland and Ireland.

The latest efforts come after an intensifying financial crisis that has sent global markets on a stomach-churning ride and put in jeopardy more banks and financial firms even after massive government bailouts of insurance giant AIG and a takeover of mortgage finance firms Fannie Mae and Freddie Mac.

The financial firms are reeling from a meltdown in US home prices after a frenzied boom that induced a wave of investments before a collapse.

The defaults drove down US house prices, reduced available cash and credit, and left financial institutions around the world, which bought many of the loans as part of complex investment instruments, exposed to the bad debts.

The crisis has led to the mergers or collapse of some of Wall Street's biggest names - including Bear Stearns, Merrill Lynch and Lehman Brothers - and now perhaps even Morgan Stanley.

Mr Paulson has faced criticism over the Fed's 85-billion- dollar rescue of insurance giant AIG by the Fed, and putting taxpaying voters on the hook for billions more weeks before the presidential election could prove unpopular.

To help the country get out from the savings and loan crisis almost three decades ago, the US government created the Resolution Trust Corp. - which bought up assets from failed banks and eventually re-sold them.

The complicated mortgage-related investments connected to the current crisis could prove harder to sell, and Paulson indicated that Congress would need to approve any such measure - effectively a massive taxpayer bailout.

'What we are working on now is an approach to deal with the systemic risk and the stresses in our capital markets,' he said after the meeting with lawmakers including House of Representatives speaker Nancy Pelosi.

'We talked about a comprehensive approach that will require legislation to deal with illiquid assets,' he said. -- AFP