The US Treasury Secretary rejected calls for executive pay caps, giving a hint of the direction the White House's new financial regulation may take.

Timothy Geithner said that instead of limits on pay, the Government needed to look carefully at the incentives created by companies' compensation programmes.

"We had a crisis magnified by the fact that people were paid to take a huge amount of short-term risk and that's something that's preventable," he said. "We shouldn't be setting broad caps, I think we should be trying to get the incentives better."

The multi-million dollar bonuses paid to banking executives have been blamed for fuelling the economic crisis that engulfed the world last year. Some lawmakers and investors have lobbied for strict limits on the amount bankers can be paid.

But Mr Geithner's comments, made during a National Press Club meeting in Washington, are likely to comfort bank bosses with their implication that the White House would introduce principles-based regulation, not specific rules on pay.

The Obama Administration is considering a number of changes to financial regulation, including new proposals last week on the sale of over-the-counter derivatives, to prevent a recurrence of the financial meltdown.

Mr Geithner said that the proposals on derivatives regulation, which include the introduction of central clearing and exchange trading for some products, were vital but would not be enough alone to turn markets around.

Derivatives such as credit default swaps were blamed for worsening the collapse of global credit markets during last year's liquidity crunch.

Mr Geithner said that he believed the US economy had stabilised, echoing comments over the past week by Ben Bernanke, Federal Reserve chairman, and White House budget director Peter Orszag.

The Treasury Secretary added, however, that the US remained in "the most challenging economic climate the country has seen in generations"

There have been several signs in recent weeks that the recession may be becoming less severe.

Consumer prices were flat in April after a 0.1 per cent fall in March, while retail sales were down 0.4 per cent compared to a 1.3 per cent drop the previous month.

Industrial production fell 0.5 per cent in April, the sixth consecutive monthly fall but the smallest drop seen in that period. Output dropped 1.7 per cent in March.

Shares were up in afternoon trading on the back of strong results from Lowe's, the second-biggest home improvement chain.

The Dow Jones industrial average was up just over 2 per cent at 8,440.52 points at 2.30pm.

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