Washington - The US government was weighing its options for a more permanent fix to the ongoing credit crisis on Thursday as regulators and authorities cracked down on stock-selling techniques that have helped fuel a sell-off on Wall Street.

President George W Bush defended the "extraordinary measures" already taken by the government to shore up a wealth of shaky financial firms and sought to reassure investors fearful that more bank failures could be on the horizon.

Speaking after an emergency White House meeting with his economic advisors, Bush promised the government would continue taking necessary actions "to strengthen and stabilize our financial markets and improve investor confidence."

Democratic Senator Charles Schumer, who chairs Congress' Joint Economic Committee, said he had spoken with government officials about setting up a new government agency that could take over the Federal Reserve's current role of pumping liquidity back into the financial system.

The agency would take on the billions of dollars in bad loans of banking firms that have been decimated by the plunging value of mortgage-related assets, and manage those firms already taken over by the government. This would allow the Federal Reserve to focus on its core competence - monetary policy.

"The Federal Reserve and the Treasury are realizing that we need a more comprehensive solution," Schumer said.

Nancy Pelosi, speaker of the House of Representatives, sent a letter to Bush urging immediate action to help banks back on their feet. Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke briefed congressional leaders on possible measures late Thursday.

"What we're working on now is an approach to deal with systemic risk in the capital markets. We talked about a comprehensive approach that will require legislation to deal with illiquid assets on financial institutions' balance sheets," Paulson said at a press briefing after the meeting.

"This country is able to come together and do things quickly when it needs to be done for the good of the American people," he said, adding that they had "come together to work for an expeditious solution."

Bernanke described the meeting as "very, very positive" and said, "We look forward to working closely with Congress to resolve this financial crisis and get our economy moving again."

While no formal plan was announced after the meeting, Pelosi said, "We hope to move very quickly. Time is of the essence." Senate Majority leader Harry Reid said he expected to see a proposal "in a matter of hours, not days."

Earlier, US and British regulators announced new crackdowns on so- called short-selling, a stock trading technique that critics argue has helped fuel a furious sell-off of financial stocks on Wall Street this week. The Securities and Exchange Commission on Wednesday banned the most extreme practices related to short-selling.

New York Attorney General Andrew Cuomo on Thursday launched an investigation into whether some investors were operating illegally. Short-selling itself is legal, but not if linked with spreading rumours that can help an investor's cause.

Wall Street investors have been at the centre of a dramatic up- and-down week in New York. Major stock indices surged Thursday on hopes of a wider solution by more than 4 per cent each - about the same amount they fell on Wednesday.

The drama signals a crisis of confidence on Wall Street since Monday - the product of bank failures, government bailouts and fears of more bankruptcies on the horizon.

Morgan Stanley, which as of this week is one of only two remaining independent US investment banks, was in talks Thursday with Wachovia Corp about a possible takeover, US media reported. The Chinese state investment fund was also reportedly in talks with the investment bank.

Washington Mutual, the largest US savings and loan bank, was reportedly shopping for a potential buyer.

Bush cited the wealth of government action taken over the past weeks in an effort to keep the financial crisis from spilling into the wider US economy, as a key gauge of economic performance dropped 0.5 per cent in August.

The New York-based Conference Board's index fell for the third time in the last four months amid an economic downturn in the world's largest economy.

In its latest bid to calm investor fears, the Federal Reserve early Thursday injected nearly 250 billion dollars into the financial system through joint action with five other central banks around the world.

The Fed nearly quadrupled the amount of dollars other central banks can auction off, in order to "address the continued elevated pressures in US dollar short-term funding markets."

Separately, the Fed added another 50 billion dollars in reserves to the US banking system through its existing loan facilities. Inter- bank lending had seized up on Wednesday as struggling banks began hoarding cash.

On Tuesday night, the government took the unprecedented move of granting an 85-billion-dollar loan and effectively taking control of insurance giant American International Group Inc (AIG).

Less than two weeks ago, the government took control of government-chartered mortgage giants Fannie Mae and Freddie Mac and pledged 200 billion dollars to keep them afloat.

Earlier this year, the Federal Reserve bankrolled JP Morgan Chase's 29-billion-dollar purchase of troubled investment bank Bear Stearns.

"These actions are necessary and they're important, and the markets are adjusting to them," Bush said Thursday morning in a brief statement, but added that investors clearly still had a long road ahead.

"Our financial markets continue to deal with serious challenges," he said. "As our recent actions demonstrate, my administration is focused on meeting these challenges."

White House spokeswoman Dana Perino on Wednesday said the interventions were being considered on a case-by-case basis. The government refused to bailout Lehman Brothers Holdings Inc, which on Monday filed the largest bankruptcy in US history.