Congress looked close to reaching a deal to approve a $700 billion plan to bail out the U.S. financial system and President George W. Bush called an emergency meeting for Thursday to hammer out details.
The move toward a deal will likely calm U.S. markets, which remained on tenterhooks on Wednesday as negotiations dragged on. Investors sought cash and safe-haven assets, briefly sending short-term interest rates below zero. Experts said banks were hoarding cash, fearful that if they loaned money to other banks they might not get repaid.
Most Asian stock markets were weaker and the U.S. dollar dipped against major currencies on Thursday on lingering worries about the timing and scale of rescue plan and fears of the financial contagion deepening.
On Wednesday, Senate Banking Committee Chairman Christopher Dodd expressed optimism a deal was nearing.
"We're not there yet," Dodd told reporters, adding there was a "good possibility we'll get there in a day or so."
Bush offered few details about the makeup of the emerging deal but warned of a looming economic disaster if Congress failed to act swiftly to fund the $700 billion bailout that would be larger than the total cost of the Iraq war.
Bush said he had called an emergency meeting with Democratic presidential candidate Sen. Barack Obama, his Republican rival Sen. John McCain and members of Congress to broker a deal.
Moments after Bush spoke on Wednesday, powerful Democrat Rep. Barney Frank said a bailout bill would pass.
"Earlier today, it became clear to me we would get the votes to pass this bill," Frank, who is chairman of the House of Representatives Financial Services Committee, told CNBC.
Frank also said there was agreement between House and Senate Democrats on what should be in the bill and that a meeting was scheduled for 10 a.m. on Thursday to meet the Republicans.
Bush used his televised speech to tell Americans there was little choice but to undertake the massive bailout, which could cost every man, woman and child in America $2,300.
"I believe companies that make bad decisions should be allowed to go out of business. Under normal circumstances, I would have followed this course. But these are not normal circumstances," Bush said.
"The market is not functioning properly. There has been a widespread loss of confidence, and major sectors of America's financial system are at risk of shutting down."
If left unchecked, Bush said the problems in capital markets would reach far beyond big business and Wall Street, guarantee a long and painful recession and make it harder for Americans to get loans to buy cars or send kids to college.
GOLDMAN OVERSHADOWED
Wrangling over the bailout overshadowed Berkshire Hathaway Inc's $5 billion investment in embattled Wall Street titan Goldman Sachs Group Inc, which is transforming into a traditional bank to shield itself from the crisis. Goldman's shares closed 6.4 percent higher.
"I am to some effect betting on the fact that the government will do the rational thing and act properly," Berkshire's Warren Buffett, one of the world's richest men and pre-eminent investors, told CNBC.
Earlier, McCain said he will break off from his campaign to return to Washington to help broker a deal, saying he feared legislation could not pass in its current form. The Arizona senator said he wanted to cancel Friday's presidential debate.
Obama indirectly accused McCain of playing politics and said the first of a series of planned presidential debates should go ahead.
"What is important is that we don't suddenly infuse Capitol Hill with presidential politics," Obama said.
Many lawmakers have demanded changes to the bailout plan, including more protections for taxpayers and restrictions on executive pay at companies that unload their bad assets.
After a week of pointed barbs on the campaign trail, McCain and Obama later took the unusual step of issuing a joint statement, calling Bush's plan "flawed" but urging fellow Republicans and Democrats to reach a solution.
"No matter how this began, we all have a responsibility to work through it and restore confidence in our economy. The jobs, savings and prosperity of the American people are at stake," the candidates' statement said.
"This is a time to rise above politics for the good of the country. We cannot risk an economic catastrophe."
Earlier, Federal Reserve Chairman Ben Bernanke and U.S Treasury Secretary Henry Paulson toiled to convince Congress to approve the plan allowing the government to buy up toxic mortgages and other bad assets that have dried up global credit. Paulson, himself a former Goldman Sachs boss who built a $700 million fortune on Wall Street, tried to downplay the cost of the rescue, saying the government could sell the assets it bought and cash would return to Treasury coffers.
Other nations braced for fallout from the crisis. Business confidence weakened in Germany, France and Italy in September, surveys showed, stoking fears the euro zone is sinking into recession as the turmoil spreads.
Nervous Asian stock markets seesawed on Thursday with Japan's Nikkei average off earlier lows by mid-afternoon, easing 0.9 percent, while China shares listed in Shanghai were up 4.2 percent, bouyed by share buybacks by state-owned firms and hopes on market reforms.
The euro rose 0.6 percent from late U.S. trade to around $1.47 while the dollar index, which tracks the currency's performance against six major currencies, dropped 0.5 percent.
Gold gained to around $890 an ounce, rising toward Tuesday's seven-week high.
The crisis comes after a month of turbulence marked by the government's takeover of mortgage companies Fannie Mae and Freddie Mac, the bailout of insurer American International Group Inc, and the bankruptcy filing of investment bank Lehman Brothers Holdings Inc.
