US markets slumped for a third day in a row on Wednesday [Reuters]

The US was also looking at a second wave of government investment into financial institutions as a quick way to cushion potential losses, he said on Wednesday.

When the Troubled Asset Relief Program (TARP) part of the bailout package was originally presented to the US congress, it had focused on purchasing bad mortgage debts from banks and other institutions, many of them as a result of the subprime crisis.

"Our assessment at this time is that this is not the most effective way to use TARP funds," Paulson said.

Paulson said support was needed for the markets that underwrite credit outside the banking system, such as credit cards, car and student loans.

Barney Frank, the Democratic head of the House of Representatives financial services committee, said he was "disappointed in Paulson" and called the shift in policy "an abandonment of the bill" negotiated between congress and the White House last month.

Despite the proposed changes, Paulson said the bailout plan had been at least a partial success and he rounded on critics of his handling of the economic crisis.

"I will never apologise for changing an approach or a strategy when the facts change," he said.

"I think the apologies should come the other way - if someone doesn't change when the facts change."

Stocks later fell sharply for the third day running on Wall Street, with the Dow Jones Industrial Average falling more than 410 points to close at 8,282 points and all the major US indices dropping more than four per cent.

Government investment

The US treasury has allocated $250bn of the fund so far to buy stocks in struggling financial institutions.

General Motors is one of the firms seeking US government aid [EPA]

A second programme to provide government investments in banks would match private investments in capital funds and be made available to more than just struggling banks.

Democrat leaders in the US congress have called on the Bush administration to give immediate aid to struggling US auto makers using funds from the bailout plan.

Barack Obama, the US president-elect, has reportedly asked George Bush, the US president, to do more to aid the industry, which has asked the government for $25bn in emergency loans amid a slump in sales.

Although Paulson said: "We care about our auto industry in the US. They are a key part of our manufacturing industry," he ruled out the possibility of using TARP for direct aiding troubled auto manufacturers.

He has also said he believed another stimulus package is necessary to stimulate the US's failing economy.

Jordan Lieberman, the publisher of Politics magazine, said that Paulson was probably trying to draw a line under government aid to private firms by not giving the auto makers aid despite the billions of dollars that had been given to Wall Street firms.

"You have to draw the line somewhere. Someone needs to feel the pain," he said.

The US government agreed to finance a $700bn bailout of Wall Street firms in October after months of chaos on international financial markets sparked in part by the US subprime mortgage crisis, when millions of Americans were granted mortgages they later found they were unable to repay.

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