The United States will pump $250 billion to buy stakes in major banks, including  Bank of America, Wells Fargo, Citigroup, JPMorgan Chase, Goldman Sachs, Morgan Stanley and Bank of New York Mellon Corp even as official data showed the threat of recession remained.

''This is an essential short-term measure to ensure the viability of America's banking system," President Bush said after a meeting with top economic advisers. The new capital would encourage banks to lend again and help spur job creation and economic growth, he added.

But he insisted the steps are ''limited and temporary'' and will in no way affect the growth of the free market.

''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," Bush said.

Under the plan, formulated by the treasury, nearly half the total funds would go to the top nine US banks, including Bank of America, Wells Fargo, Citigroup, JPMorgan Chase, Goldman Sachs, Morgan Stanley and Bank of New York Mellon Corp.

''Citi, JPMorgan, Bank of America and Wells Fargo would receive investments of $25 billion each. Goldman Sachs and Morgan Stanley will get $10 billion each,'' the New York Times said in a report.

Media reports said Merrill Lynch and State Street Corp would also receive fresh capital injection.

''These steps will allow us to restore more normal market functioning and encourage private capital to further support the reinvigoration of financial markets,'' Federal Reserve chairman Ben Bernanke wrote in an article in the Wall Street Journal.

The US moves follow similar steps taken by European states to restore market confidence.

The concerted European moves along with supporting action in Asia Pacific and the Middle East have helped restore market confidence.

Major European economies, however, showed signs of flagging output and falling business confidence. Even smaller countries like Iceland suffered. Iceland, in fact, is seeking a loan from Moscow. (See: Iceland headed for bankruptcy; PM seeks $5.44-billion Russian loan)

German investor sentiment declined sharply this month, according to a ZEW research institute survey while the the Bank of France said the French economy contracted 0.1 per cent in the third quarter, and British inflation hit a 16-year high of 5.2 per cent.

These developments prompted former US Federal Reserve Chairman Paul Volcker to conclude that the United States, the world's biggest economy, as also Europe, was already in recession.

''The US financial system is already in the emergency ward and will move into intensive care,'' Volcker said in Singapore.

''I'm afraid it's going to be there for a considerable period of time before it returns to normal,'' he said in a lecture.

Volcker said he feared Europe was in the same situation as the US and called on governments around the world to ensure that any recession was manageable and short-lived.