Henry Paulson announced a $700 billion U-turn on Wednesday when he said that Washington would no longer be using taxpayer money to buy distressed assets from troubled banks.

The Treasury Secretary's change of heart marks a dramatic shift, given that the primary purpose of the $700 billion bailout fund, approved in Washington only in September, had been to purchase mortgage-backed securities from troubled lenders.

Instead, Mr Paulson said that he planned to use all the funds — $350 billion of which has already been earmarked — to inject capital into banks by acquiring equity stakes in them. At the same time, the US Treasury Secretary, who has less than three months left in office, said that he supported the idea of bailing out America's collapsing car industry but insisted that his bailout fund should not be used for that purpose.

Mr Paulson, acknowledging the U-turn, said: “I will not issue an apology for changing the strategy when the facts change. We had to move quickly. What we said to Congress then [in September] was that we needed a financial rescue package. And we got a wide array of authorities to use it.”

Mr Paulson's announcement yesterday moves US Treasury policy more into line with the European approach to the financial crisis. The British Government, in particular, has bought stakes in banks and there have been increasing efforts to have a co-ordinated global strategy towards shoring up financial institutions ahead of the G20 summit in Washington this weekend.

Some Democrats have expressed concern that banks getting an injection of taxpayer investment under the plan are not using the money to make loans. A similar programme in Britain has included a government mandate to maintain levels of lending, although bankers privately concede that may not be enforceable.

The Treasury Secretary yesterday said pointedly that the actions he is taking would make banks “more confident and better-positioned to play their necessary role to support economic responsibility”.

Barack Obama and his transition team, who have been in close consultation with Mr Paulson over recent weeks, have resisted invitations to “co-own” the bailout as they emphasise that the Bush Administration would remain in charge until the inauguration on January 20.

The President-elect will not be attending the G20 summit, announcing yesterday that two emissaries — Madeleine Albright, the former Secretary of State, and Jim Leach, an ex-Republican congressman — would go in his place to meet foreign leaders.

Mr Paulson has said that he is committed “to making sure that the incoming team can hit the ground running” and yesterday said that he would continue to brief Mr Obama's advisers.

The focus of Mr Obama and congressional Democrats for the moment remains on securing additional help for America's troubled carmaking industry, suggesting that some of the $700 billion should be used to prop up companies such as General Motors, which may be only weeks from bankruptcy.

Mr Paulson signalled the administration's resistance to such a proposal, saying that while he cared about the motor manufacturers, “my focus is on the financial sector”.

However, with all but $60 billion of the first $350 billion instalment of the Wall Street bailout already committed, the Treasury will need to go back to Congress before getting its hands on the next tranche of taxpayers' money. This will put Democrats in a strong position to demand additional help for the carmakers.

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