Henry Paulson urged Wall Street banks yesterday to raise new capital rapidly to shore up their finances as a $22 billion (£10.8 billion) investment fund collapsed, marking one of the worst casualties of the credit crisis.

Announcing a plan to reform the American mortgage market, the US Treasury Secretary made the extraordinary plea to domestic lenders and urged them to cut dividends paid to shareholders to conserve capital.

Mr Paulson said: “We want institutions [lenders] to play the role that we need them to play for our economy. They need to raise capital. That’s the first priority.”

The final collapse of the Carlyle Capital Corporation, part of Carlyle Group, the private equity giant – and the perception that Washington fears the credit crisis will worsen – pushed the dollar to its weakest level against the yen for 12 years, a new low against the euro and parity with the Swiss franc. The Dutch-listed fund owned by Carlyle appeared to be heading for liquidation after failing to pay back $16 billion of debt to its lenders.

The dollar’s slide prompted Morgan Stanley and Goldman Sachs to predict that it is now likely that G7 countries will be tempted to intervene in world currency markets to prop it up. Such a move would be the first since 1995.

The Carlyle Group said yesterday it had been unable to reach an agreement with lenders and expected them to seize the fund’s remaining assets, which are mainly residential mortgage-backed bonds. This month 13 funds have either announced their intention to close or to freeze capital. David Rubenstein, co-founder of Carlyle Group, told The Times last night that he was exploring ways of compensating burnt shareholders in CCC. He said: “We do regret the situation. We don’t want to walk away from this. We are looking at ways to help the shareholders.”

Explaining the deterioration in markets that wiped out CCC, he said: “We were caught in a perfect storm.” Andrea Cicione, a credit strategist for BNP Paribas, one of Carlyle Capital’s lenders, said: “We’ve been expecting, for a while, for the hedge funds to get into trouble. We are in a vicious spiral of unwinding years of increasing leverage in the space of a few weeks, and no one can say how much leverage must be wrung out before the unwinding comes to an end.”

Dealers bought gold and oil to try to hedge themselves against the sliding dollar, with the price of gold surpassing $1,000 an ounce for the first time and oil futures contracts for US sweet crude hitting $111 a barrel. To add to the gloom, data showed American retail sales in February fell 0.6 per cent over the month, compared with an expected 0.2 per cent decrease.

RealtyTrac, the California-based foreclosure specialist, published data showing the number of American households that had filed for foreclosure had jumped 60 per cent last month compared with the previous February. The numbers suggest that attempts by Washington to force lenders to negotiate with borrowers who are struggling to keep up with mortgage repayments are not working.

Ian Shepherdson, the chief US economist for High Frequency Economics, said: “What is really scary is that there is weakness everywhere across the US economy and discretionary spending is taking a hit.”

In a further sign of distress, Thornburg Mortgage received a default notice from Morgan Stanley, the investment bank, after failing to meet a $9 million margin call.

Although shares on Wall Street plunged 130 points in early trading in reaction to the collapse of Carlyle’s fund and sliding retail sales, the Dow Jones industrial average managed to close at 12,145.70, up 35.50, on positive sentiment expressed by Standard & Poor’s. The credit rating agency’s report on US banking predicted that although sub-prime mortgage writedowns could reach $285 billion, the end was in sight for new writedowns at large financial institutions.

However, the upbeat mood was fragile and shortlived. In after-hours trading, shares of Wall Street’s banks dropped after Lehman Brothers published a research note predicting that investment banks will face widening losses on new asset writedowns. The note stoked fears that Bear Stearns, the smallest of Wall Street’s banks, is facing liquidity problems. Its shares fell the furthest, down by 12 per cent to their lowest level for six years.

To try to restore confidence, Mr Paulson also said yesterday he wanted to introduce new licensing arrangements for mortgage brokers, to prevent mortgage mis-selling, and to make credit rating agencies publish more information on the securities they cover.

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