The United States government ushered in a new era in banking today with plans to take stakes worth up to $250 billion in financial institutions.

As part of the deal bank executives must accept limits on their pay, and standards of corporate governance.

President George W Bush said the broad and flexible rescue plan was aimed at the "root cause" of the problem.

Purchasing equity shares in banks was "an essential short-term measure", he said.

Mr Bush also issued a temporary guarantee of "most new debt issued by insured banks" and expanded government insurance to cover most small business accounts.

The US was taking "unprecedented and aggressive steps" to tackle the financial crisis and international economic leaders have the "full support of the United States", Mr Bush said.

Mr Bush announced the plan for the US government to buy shares in banks following an early morning meeting with his financial advisers.

Speaking in the White House Rose Garden, Mr Bush said: "We discussed the unprecedented and aggressive steps the federal government is taking to address the financial crisis.

"Federal agencies have moved decisively to shore up struggling institutions and stabilise our markets. And the United States has worked with partners around the world to coordinate our actions to get our economies back on track."

He said the decision of European leaders to purchase equity in major banks and provide temporary government guarantees for bank loans were "wise and timely actions, and they have the full support of the United States".

He said the injection of US capital using money from the 700 billion dollar (£398bn) rescue plan, seen by many as a Wall Street bail-out, "will help struggling banks fill the hole created by losses during the financial crisis, so they can resume lending and help spur job creation and economic growth".

"This is an essential short-term measure to ensure the viability of America's banking system," he said.

"And the programme is carefully designed to encourage banks to buy these shares back from the government when the markets stabilise and they can raise capital from private investors."

This is an essential short-term measure to ensure the viability of America's banking system President Bush

The Federal Reserve will also finalise work on a new programme to serve as a buyer of last resort for commercial paper in a bid to unfreeze the market.

He said US Treasury Secretary Hank Paulson would "make clear that each of these new programmes contains safeguards to protect the taxpayers".

"They will make clear that the government's role will be limited and temporary," he said.

"And they will make clear that these measures are not intended to take over the free market, but to preserve it."

He said he realised "Americans are deeply concerned about the stress in our financial markets".

"The measures I have announced today are the latest steps in this systematic approach to address the crisis," Mr Bush said.

"I recognise that the action leaders are taking here in Washington and in European capitals can seem distant from those concerns.

"But these efforts are designed to directly benefit the American people by stabilising our overall financial system and helping our economy recover.

"It will take time for our efforts to have their full impact, but the American people can have confidence about our long-term economic future.

"We have a strategy that is broad, that is flexible, and that is aimed at the root cause of our problem.

"Nations around the world are working together to overcome this challenge. And with confidence and determination, we will return our economies to the path of growth and prosperity."

Mr Bush's announcement came after the Dow Jones industrial average of blue chip firms gained more than 11% - its biggest one-day gain since 1933 - in a huge rally yesterday.

Traders reacted with relief to efforts by the US and Europe to inject capital into banks and get lending flowing again.

The move also followed a £37 billion bail-out by the UK Treasury of three leading British banks as governments around the world pumped trillions of dollars into private institutions yesterday.

Later, Mr Paulson said the US was buying equity stakes in a "wide variety of banks".

"The government owning a stake in any private US company is objectionable to most Americans, me included," he said.

"Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable."

He said the lack of confidence in the financial system "must be conquered because it poses an enormous threat to our economy".

"We regret having to take these actions," he said.

"Today's actions are not what we ever wanted to do - but today's actions are what we must do to restore confidence to our financial system."

He said investors were unwilling to lend to banks, and healthy banks were unwilling to lend to each other, to consumers and to businesses.

Mr Paulson went on: "We are acting with unprecedented speed, taking unprecedented measures that we never thought would be necessary.

"But they are necessary to get our economy back on an even keel, and secure the confidence and future of our markets, our economy and the economic well-being of all Americans."

He added: "America is a strong nation. We are a confident and optimistic people.

"Our confidence is born out of our long history of meeting every challenge we face.

"Time and time again our nation has faced adversity and time and time again we have overcome it and risen to new heights. This time will be no different."

In addition, the Federal Reserve, the US central bank, said it would begin buying short-term debt in a bid to break through the credit clog on October 27.

Fed chairman Ben Bernanke welcomed all the new steps but added that policymakers would continue to take actions as needed to battle the crisis.

"Our strategy will continue to evolve and be refined as we adapt to new developments and the inevitable setbacks," he said.

"But we will not stand down until we have achieved our goals of repairing and reforming our financial system and thereby restoring prosperity to our economy."