WASHINGTON: The US government has announced the biggest financial bailout in the country's history as it took troubled mortgage giants Freddie Mac and Fannie Mae into temporary public ownership to save them from collapse.

The US treasury secretary, Henry Paulson, said the Federal Housing Finance Agency, hitherto the two companies' regulator, would henceforth run the companies in a state of "conservatorship" and the two chief executives would be replaced by new men.Paulson had briefed presidential candidates Barack Obama and John McCain about the plan.

McCain gave it his immediate backing but Obama said he would reserve judgment until he saw further details, adding that determining the future of the companies would be a top priority if he won the White House.

"We have to protect taxpayers and not bail out the shareholders and management," he said.The plan received the full backing of the Federal Reserve chairman, Ben Bernanke, and financial markets appeared likely to be cheered by the news.

The move helped put a prop under one part of the financial system that had been looking particularly shaky for several months.Fannie Mae and Freddie Mac, with a combined 11,000 employees, have funded more than two-thirds of US home loans in recent months, and doubts over their ability to continue doing so had threatened to immerse the economy into even more turmoil. With home loans harder to come by, buyers have recently been unable to make purchases, causing the housing market to tank further, leaving banks and other lenders with huge losses.

Those losses, in turn, have made loans even harder to get. "Our economy will not recover until the bulk of this housing correction is behind us," Paulson said. "Fannie Mae and Freddie Mac are critical to turning the corner on housing." There is no guarantee that the takeover will work, and it comes at a potentially massive cost to taxpayers.

The government has pledged to inject money in the companies in any quarter in which they would otherwise be insolvent -- up to $100 billion in total for each company. "This is a shareholder bailout financed by the US taxpayers," said Armando Falcon Jr., formerly the chief regulator of Fannie Mae and Freddie Mac.

Paulson also announced a separate program in which the government will start buying securities backed by mortgages -- $5 billion worth, initially. That will, in effect, subsidize the purchase of homes by lowering the interest rate that buyers must pay for a mortgage.Rumors of the move were sufficient to push shares up on Wall Street after the London stock markets had ended a bad week by shedding another 2.25% to close at 5,240.7.The US government was forced to announce a plan to prop up the finances of the troubled mortgage giants in July.

Paulson said then that Washington would buy up shares in the two companies and underwrite their ballooning debt, which has risen to around $800bn (£452bn) each. Congress at the time approved lending unlimited amounts to the two companies or taking a stake in them if they ran into real trouble.The two companies have lent or underwritten about $5.3 trillion of the total $12tn of outstanding mortgage debt in the United States.

Freddie and Fannie have long been considered as being too big to be allowed to fail.The collapse in the housing market and surge in mortgage defaults meant the two groups racked up a combined $14bn of losses over the past year.Although there are increasing signs from the US that house prices are stabilising after falling for two to three years, many analysts say the housing market's problems are far from over.