Bush: will put capital into banks via equity stakes

WASHINGTON (Reuters) - U.S. President George W. Bush said on Tuesday the U.S. government will directly inject capital into financial institutions by buying equity stakes in a bid to help thaw credit markets frozen by the housing market collapse.

"This is an essential short-term measure to ensure the viability of America's banking system," he said after meeting with his top economic advisers, adding that the new capital would encourage banks lending again, which would spur job creation and economic growth.

"The program is carefully designed to encourage banks to buy these shares back from the government when the markets stabilize and they can raise capital from private investors," Bush said.

He insisted the government's steps would be "limited and temporary" and not designed to take over the free market.

Sources have said the U.S. Treasury Department plans to inject some $250 billion into U.S. banks, using funds from the $700 billion bailout package Congress approved and Bush signed earlier this month.

The decision on direct capital injections into banks is an about-face for the Bush administration. U.S. Treasury Secretary Henry Paulson previously told lawmakers that doing so would be an admission of failure.

The new plans, coupled with similar efforts in other major wealthy countries, sent stock markets around the globe soaring after they had racked up huge losses last week.

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

(Reporting by Jeremy Pelofsky and Tabassum Zakaria, Editing by Chizu Nomiyama)