He had initially dismissed the idea of taking equity stakes in crippled banks, and his change of heart on Friday may reflect a growing conviction that the severity of the credit crisis warrants a more direct approach.

The Treasury plan aims to help banks rapidly shore up their dwindling capital so that they are more willing to lend to businesses, individuals and one another.

The announcement followed Wall Street's most tumultuous week ever, including a historically volatile session on Friday that saw the Dow Jones Industrial Average whipsaw over a range of 1,000 points.

Mr Paulson said the Treasury Department was working on a plan to buy equity in 'a broad array of financial institutions', using some of the US$700billion (S$1trillion) in the financial rescue package approved by Congress recently.

The equity would be in the form of non-voting shares, a move that may temper the government's ability to meddle with management.

The Treasury Secretary made the announcement after emerging from a meeting of finance ministers and central bankers of the world's leading industrial democracies.

In an apparent response to critics who want a more specific action plan from the G-7 meeting, Mr Paulson said: 'Some in the press and some in the markets are naive if they think that different countries with different financial systems, economies in different stages of development...and different political systems, different laws, are going to come up with precisely the same policy to deal with the issues.'

But he added that all participants at the meeting agreed that strong steps were necessary, noting that 'this is a period like none of us has ever seen before'.

The Treasury's equity-purchase programme was widely favoured by economists, who argued that it would be preferable to buying bad mortgage securities from banks, the centrepiece of the financial bailout Bill.

'Buying mortgage assets is plagued with problems,' said Professor Glenn Hubbard, dean of the Columbia Business School.

In recent weeks, the US Treasury and Federal Reserve System have taken unprecedented steps to protect the economy from the effects of the global credit crisis. And much more aggressive steps are looming, say government and economic observers.

The Fed, for example, has moved to thaw out the commercial paper market - the provider of short-term loans for companies ranging from massive conglomerates to provincial manufacturing firms.

The central bank's announcement last week that it would create a 'backstop facility' - essentially a form of guarantee - for commercial paper began to lower interest rates on the debt for some borrowers within a day or so.

But many observers say the steps taken thus far do not adequately address the root cause of the credit crisis - rising defaults and foreclosures on mortgages issued to over-extended borrowers who are now financially strapped and unable to keep their homes under their existing loan terms.

Although some home-owner relief has been enacted by Congress, the economy appears to be slowing sharply and job losses are mounting. That has triggered calls for a bailout for Main Street.

Indeed, Democratic leaders in Congress have already said they would propose a new economic stimulus package, possibly to be considered in a special session after the Nov4 election.

Among the initiatives that can also be taken by the federal government are programmes to convert some mortgages on homes with values that have fallen below their mortgage balances from adjustable-rate to fixed-rate loans. That change might make the mortgages more affordable for certain owners.

Los Angeles Times