Washington  - The Obama administration Tuesday launched an all-out effort to stabilize the financial sector with a plan to inject up to 2 trillion dollars into the system through new government guarantees, lending and harnessing private capital.

The moves are designed to keep banks afloat, restore credit availability to US consumers and help homeowners and small businesses, Treasury Secretary Timothy Geithner said in Washington as he announced the multi-pronged approach aimed at pulling the US out of its worst financial crisis since the Great Depression.

The overhaul includes three new programmes: a public-private partnership to get capital into the market and buy up troubled assets, an expanded programme to boost lending to consumers, and efforts to save banks that would include a complete review of their balance sheets.

The federal public-private partnership would begin with 500 billion dollars and could ultimately inject up to 1 trillion dollars into financial markets, while a separate Federal Reserve programme to expand credit would provide as much as another 1 trillion dollars, Geithner.

The new financial measures will involve all government financial agencies.

The unveiling comes as the US Senate was preparing, also Tuesday, to approve a separate economic recovery package totalling more than 800 billion dollars to stabilize the wider economy.

"To get credit flowing again, to restore confidence in our markets, and to restore the faith of the American people, we are going to fundamentally reshape our programme to repair the financial system," Geithner said.

Much of the attention of the first blueprint for the financial sector laid out by the incoming administration of President Barack Obama focuses on dealing with the toxic mortgage assets that have burdened banks and led them to drastically scale back lending.

The public-private partnership fund is designed to take many of these assets off their hands, functioning like a "bad bank." A portion of the mortgage-backed securities will also remain in the hands of financial institutions, but banks will be guaranteed by the government against some of the worst losses.

The plan also comes with a series of new rules for banks that accept government funds, including greater transparency, curbs on executive salaries and a requirement that financial firms use the money to boost lending to consumers.

The Federal Reserve said it would dramatically expand a programme designed to revive consumer loans for cars, university tuition and credit cards. The Fed's Term Asset-Backed Securities Loan Facility could be scaled up from 100 billion dollars to 1 trillion dollars.

Geithner stressed that the government must also work to help more homeowners from falling into foreclosure and said the administration will announce details of a plan to help them with existing funds within the next few weeks. At least 50 billion dollars from the rescue package are expected to be used to help homeowners avoid foreclosure.

US financial institutions have reported more than 500 billion dollars in losses in the worst financial crisis since the Great Depression, the result of a sharp downturn in the housing market that has led to more than 3 million foreclosures of US homes, a record number.

But part of the problem has been an inability to accurately value banks' remaining mortgage assets. With rising unemployment, it's not clear how many more people will have to default on loans, making it tough for banks to figure out how much capital they need to backstop their mortgage holdings. The government purchases and guarantees are designed set aside some of those fears.

In a bid to ward off criticism about the size of the effort and the appearance of rewarding banks that helped bring on the crisis, Geithner stressed the need for the government to act swiftly and decisively in order to protect ordinary citizens.

"We believe that policy has to be comprehensive and forceful. There is more risk and greater cost in gradualism than there is in aggressive action. We believe that action has to be sustained until recovery is firmly established," he said.

The government will also attempt to make the efforts as transparent as possible by posting information about agreements with banks on a public website, www. financialstability. gov.

About half of an earlier 700-billion-dollar financial bail-out plan adopted in October has already been handed out to banks.

The US economy has been sent into a tailspin in recent months as banks restricted lending, consumers stopped buying new products and businesses struggled to survive amid the falling demand.

More than 1.5 million jobs were lost in the last three months and the world's largest economy contracted 3.8 per cent in the fourth quarter of 2008. dpa