The US Federal Reserve threw a surprise $800 billion lifeline to Wall Street's fractured credit markets in the latest sign that Washington has been stunned by the speed and severity of the American economic recession.

The new funds bring the total amount of taxpayer money used to bail-out America to $1.7 trillion, with another $500 billion of tax cuts in the pipeline.

As Washington sought to accelerate federal handouts, European lawmakers were drawing up their own financial stimulus package, although details of the size of the Continental rescue were unclear.

America's latest state aid fund is to be sliced into two tranches and has been designed to make it easier for Americans to obtain car, credit card, and student loans.

The first chunk of $200 billion will be used to lend money to holders of distressed debt that is backed by consumer or small business loans. Given that the troubled bonds are effectively untradeble, the Fed is offering to lend funds using the debt as collateral. The measure means that banks can secure new capital but do not have to sell and take a subsequent loss on the bust bonds. This part of the scheme is to be called the Term Asset Backed Securities Loan Facility, or TALF.

America's central bank said it will also use a second tranche to start buying $600 billion worth of Government Sponsored Enterprise backed-debt to try and thaw frozen credit markets.

The bail-out exceeds the $700 billion rescue fund created only last month to provide emergency capital to America's banks, known as the Troubled Asset Relief Programme, or Tarp. It also comes on top of the $158 billion of tax rebates returned to Americans last May and plans for $500 billion worth of new tax cuts from Washington. The Dow Jones Industrial Index was up slightly by 36.08 points to close at 8,479.47 as investors bought financial shares on optimism that the Fed’s latest plan will help ease the stress on the market.

It came as Wall Street received new grim evidence of the speed at which the American economy is deteriorating. Revised growth numbers showed that the world's largest economy had shrunk far more than expected in the third quarter of the year. Gross domestic product for the three-month period fell by 0.5 per cent rather than the 0.3 per cent as originally stated before the revision. The contraction marks the sharpest slowdown since the terrorist attacks of 2001.

Worse, new consumer spending numbers showed the steepest fall for 28 years. According to the US Commerce Department, consumer spending that fuels two-thirds of US economic activity, fell 3.7 per cent in the third quarter rather than 3.1 per cent as previously estimated - the sharpest rate of decline since the second quarter of 1980.

The S&P Case-Shiller index - widely seen as the most authoritative measure of American real estate values - recorded its biggest one-month decline. In September, American house prices fell by 17.4 per cent compared with the same month the year before.

The miserable data increases the pressure on the US Federal Reserve to slash interest rates by at least half a percentage point when it next meets in mid-December. A half point cut would reduce the cost of borrowing to just 0.5 per cent.

Separately, Brussels was finalising a recovery plan and financial stimulus to be unveiled on Wednesday, designed to protect jobs, encourage consumer spending and offer soft loans to key industries.

Refusing to confirm figures last night, the European Commission did say that it would temporarily relax key competition rules, possibly to allow individual EU member states to pump more aid into ailing industries during the worst months of the economic crisis.

The European Investment Bank has been asked to make billions of euros available for the car and construction industries to help them adapt to greener production methods as the EU pushes ahead with long-term targets to reduce greenhouse gases.

Around €6 billion in cash already earmarked for regional spending in the 27 EU countries will be made available several years early to enable infrastructure projects such as new roads and bridges to continue so that jobs are not lost as the recession hits national treasuries.

In rare explicit comment on interest rates - the domain of the European Central Bank - a draft of today's European Commission plan argued that the ECB had further room to ease monetary policy. The bank has signalled it may cut rates on December 4, and markets expect a 50-75 basis point cut from the current 3.25 per cent. "Emerging evidence of lower inflationary pressures in the face of slumping demand provides scope for further reductions in interest rates," the draft said.

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