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The United States, in its boldest move yet to calm financial markets, is expected to announce a plan Tuesday to invest up to $250-billion in banks and a blanket guarantee of all deposits.

U.S. Treasury Secretary Henry Paulson met in Washington Monday with the bosses of the country's largest banks to outline the plan, during which he essentially told the participants they would have to accept government investment for the good of the American financial system.

The capital-injection plan will use a huge chunk of the $700-billion approved by Congress to buy toxic assets from financial institutions. Now, as much as $250-billion will reportedly be used to inject capital into banks, a course of action that will make the government a part owner of more financial institutions.

The government is expected to buy preferred equity stakes in nine top financial institutions, according to the New York Times. Citigroup and JPMorgan Chase were told they would each get $25-billion; Bank of America and Wells Fargo, $20-billion each (plus an additional $5-billion for their recent acquisitions); Goldman Sachs and Morgan Stanley, $10-billion each, with Bank of New York Mellon and State Street each receiving $2- to $3-billion. Wells Fargo will get $5-billion for its acquisition of Wachovia, and Bank of America the same amount for its purchase of Merrill Lynch.

The unprecedented move is meant to give the biggest U.S. banks cash to address their own financing needs, such as repaying debts that are coming due. From the government's perspective, such action is necessary to stabilize the banks and, critically, thaw the lending freeze that has chilled economic growth.

Of course, the investment poses a risk for U.S. taxpayers, should those banks falter, but it also gives the government a chance to collect a share of Wall Street's profits should the banks bounce back.

Some banks initially resisted the plan, fearing they would be seen as dependent on Washington. They also risk diluting the value of common shares.

U.S. officials will announce details of the U.S. plan this morning, the Treasury Department said. The move follows pledges by the governments of Britain, Germany, France and other European countries of more than $2-trillion to bolster their own banks.

The European plan sent world stocks soaring and gave Wall Street its biggest one-day gain ever. The blue-chip Dow Jones industrial average took off, rocketing up a record 936.42 points to 9,387.61 or 11.1 per cent – the largest percentage gain since 1933. The Columbus Day rally erased some of last week's dramatic stock-market losses, but still leaves the Dow and other major indices nearly 40 per cent below their record highs of a year ago.

After weeks of doom-and-gloom talk, investors are apparently convinced that governments will spend whatever it takes to avoid a total financial meltdown.

“The world seems like a safer place,” said Carl Weinberg, chief economist at High Frequency Economics.

But the expanded bailout likely won't be enough to save the United States and much of the rest of the world from a protracted recession, he added.

“The world was headed into a global recession anyway,” Mr. Weinberg pointed out. “It has suffered important battle damage from the credit crunch.”

Before the meeting, President George W. Bush vowed his government would continue taking steps to help banks “gain access to capital, to strengthen the financial system and to unfreeze credit markets and restore confidence in our financial system.”

Mr. Bush said the actions would be “consistent” with the principles set out in a communiqué issued over the weekend by Canada and the other Group of Seven countries.

“America will continue to work closely with the other nations to co-ordinate our response to this global financial crisis,” Mr. Bush said after a meeting at the White House with Italian Prime Minister Silvio Berlusconi.

Finance Minister Jim Flaherty likewise hinted that Ottawa may do more to shore up Canada's banks. In a statement, he said he would take “whatever steps are necessary” to make sure Canadian financial institutions aren't put at competitive disadvantage to foreign rivals.

Canada currently insures deposits up to $100,000. Large depositors could move their cash to banks in the United States and elsewhere unless Ottawa keeps pace.

The revamped U.S. plan is expected to include a temporary guarantee of all bank deposits – up from the $250,000 (U.S.) cap in its original plan. That matches what most European countries have pledged.

Washington is also looking at guaranteeing new bank debt as well as all lending between banks.

“Europe has forced Washington's hand,” said analyst Donald Straszheim of Roth Capital Partners in Los Angeles. “The U.K. and many of the major EU countries are already proceeding with de facto nationalization of their banking systems and the direct infusion of capital.”

If the United States follows suit, it should “remove the credit markets' noose” and get interbank lending going again, Mr. Straszheim said.

Neel Kashkari, Mr. Paulson's newly appointed point man on the rescue, noted that the Treasury Department won't be limited in how it spends the $700-billion.

“Treasury worked hard with Congress to build in this flexibility because the one constant throughout the credit crisis has been its unpredictability,” said Mr. Kashkari, a 35-year-old former investment banker at Goldman Sachs, where Mr. Paulson was chief executive before joining the Bush administration.

“Our work is only beginning. A program as large and complex as this would normally take months – or even years – to establish. We don't have months or years.”

Several top Wall Street CEOs met Mr. Paulson in Washington to review the rescue, including Lloyd Blankfein of Goldman Sachs, John Mack of Morgan Stanley, Vikram Pandit of Citigroup, Jamie Dimon of JPMorgan Chase & Co. and Kenneth Lewis of Bank of America Corp.

They left the Treasury Department without talking to reporters.

Investors are feeling more optimistic than they have in days after a dramatic weekend when global financial authorities pledged extreme measures to deal with the crisis.

Adding to the positive mood, U.S. regulators approved a capital injection into troubled investment bank Morgan Stanley by Japan's Mitsubishi UFJ Financial Group Inc. As well, central banks in the United States and Europe said Monday they would inject as much U.S. dollar liquidity into the commercial banks as they needed, for as long as they need it. That had an instant impact on bank-to-bank lending rates, which have soared in recent weeks amid fears of a total financial meltdown.

It's not clear how countries will pay for all this. But the rescue plans keep coming.

Early Tuesday, Japan unveiled its plans to deal with the crisis, including a possible injection of public funds into regional banks, while Australia announced a $7.25-billion package to counter the slowdown. Tokyo share prices surged more than 12 per cent in the first day of trading after a holiday Monday, encouraged by gains on Wall Street and in Europe.

With a report from The New York Times