America's new President meets his economic advisers today to discuss his plan to rescue the banking system, a day after shares in the country's biggest banks fell to their lowest point in more than 10 years.

Barack Obama is considering new ways of injecting capital into the banks and setting up a "bad bank" to take some of the toxic assets from financial groups' balance sheets.

The Dow Jones Industrial Average fell by 332.13 points, or 4 per cent, to 7,949.09 yesterday, the first time it has closed below 8,000 since November, on fears that US banks would need more cash from the Government to survive. It was the Dow's worst Inauguration Day performance in history.

The futures markets had a small rebound today on upbeat news from the technology sector, including a better-than-expected profits outlook from IBM.

In his inaugural address yesterday, President Obama called for "bold and swift" action to avert a worsening of the recession that is gripping America.

The Federal Reserve and the Federal Deposit Insurance Corporation have advised on the creation of a bad bank to buy hundreds of billions of dollars worth of securities from banks using some of the $350 billion left of the $700 billion Troubled Asset Relief Programme (Tarp) created by the Bush Administration.

President Obama could also agree to provide government guarantees on bank holdings or buy convertible securities from the banks. The securities would pay interest in the same way as a bond but could later be converted to common shares, leaving a chunk of the banking sector in government ownership.

These purchases by the Government could be matched by private capital raised from shareholders.

About $200 billion from the Tarp has been used to prop up the banks' balance sheets but the cash injection has not eased lending conditions. Nor did the extra capital convince investors that the banks were strong enough to withstand further losses on their toxic assets.

Nationalisation of the most troubled banks would be a last resort.

Last week the UK announced a £50 billion bailout of British banks, including a guarantee for the banks against losses on their assets.

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