Vast Bailout by U.S. Proposed in Bid to Stem Financial Crisis WASHINGTON - The head of the Treasury and the Federal Reserve began discussions on Thursday with Congressional leaders on what could become the biggest bailout in United States history. While details remain to be worked out, the plan is likely to authorize the government to buy distressed mortgages at deep discounts from banks and other institutions. The proposal could result in the most direct commitment of taxpayer funds so far in the financial crisis that Fed and Treasury officials say is the worst they have ever seen. Senior aides and lawmakers said the goal was to complete the legislation by the end of next week, when Congress is scheduled to adjourn. The legislation would grant new authority to the administration and require what several officials said would be a substantial appropriation of federal dollars, though no figures were disclosed in the meeting. Democrats, having their own desire for a second round of economic aid for struggling Americans, see the administration's request as a way to win White House approval of new spending to help stimulate the economy in exchange for support for the Treasury request. Democrats also say they will push for relief for homeowners faced with foreclosure in return for supporting any broad bailout of struggling financial institutions. "What we are working on now is an approach to deal with systemic risks and stresses in our capital markets," said Henry M. Paulson Jr., the Treasury secretary. "And we talked about a comprehensive approach that would require legislation to deal with the illiquid assets on financial institutions" balance sheets," he added. One model for the proposal could be the Resolution Trust Corporation, which bought up and eventually sold hundreds of billions of dollars" worth of real estate in the 1990s from failed savings-and-loan companies. In this case, however, the government is expected to take over only distressed assets, not entire institutions. And it is not clear that a new agency would be created to manage and dispose of the assets, or whether the Federal Reserve or Treasury Department would do so. The bailout discussions came on a day when the Federal Reserve poured almost $300 billion into global credit markets and barely put a dent in the level of alarm. Hoping to shore up confidence with a show of financial shock and awe, the Federal Reserve stunned investors before dawn on Thursday by announcing a plan to provide $180 billion to financial markets through lending programs operated by the European Central Bank and the central banks of Canada, Japan, Britain and Switzerland. But after an initial sense of relief swept markets in Asia and Europe, the fear quickly returned. Tensions remained so high that the Federal Reserve had to inject an extra $100 billion, in two waves of $50 billion each, just to keep the benchmark federal funds rate at the Fed's target of 2 percent. None of those actions, however, brought much catharsis or relief, with banks around the world remaining too frightened to lend to each other, much less to their customers. This forced Mr. Paulson and Ben S. Bernanke, the Fed chairman, to think the unthinkable: committing taxpayer money to buy hundreds of billions of dollars in distressed assets from struggling institutions. Rumors about the Bush administration's new stance swept through the stock markets Thursday afternoon. By the end of trading, the Dow Jones industrial average shot up 617 points from its low point in midafternoon, the biggest surge in six years, and ended the day with a gain of 410 points or 3.9 percent. The rally continued in early trading in Asia. The Australian market was up 3.5 percent by mid-day there and the Nikkei 225 Index was up 2.9 percent in Tokyo. "The markets voted, and they liked the proposal," said Laurence H. Meyer, vice chairman of Macroeconomic Advisers. The stock surge began after Senator Charles E. Schumer, Democrat of New York, announced his own proposal for a government rescue on the Senate floor and declared that both the Treasury and the Federal Reserve were open to all ideas. "The Federal Reserve and the Treasury are realizing that we need a more comprehensive solution," Mr. Schumer said. I've been talking to them about it. Still, the evening discussions took most of Washington by surprise, especially since Congress had been trying to finish up its business and head home to campaign for re-election. The scale and complexity of the project are almost certain to create huge philosophical differences among the parties, which could make negotiations difficult to say the least. Still, lawmakers said the goal was to work through the coming weekend and to have both the House and Senate vote on a measure by the end of next week. As they exited the session, grim-faced lawmakers said they would await proposals from the Treasury Department. The Senate majority leader, Harry Reid, said he expected to see a proposal within hours, not days. "What we agreed to do is sit down together on a bipartisan basis and work together to solve the problem," said Senator Mitch McConnell of Kentucky, the Republican leader, who said no specific approach was advocated by the administration officials. President Bush and his top advisers have adamantly opposed bailouts, but the mortgage crisis has already forced the Treasury and the Fed to bail out four of the country's most prominent financial institutions - Bear Stearns in March; Fannie Mae and Freddie Mac earlier this month; and American International Group, the insurance conglomerate, just this week. Created in 1989, the Resolution Trust Corporation disposed of bad assets held by hundreds of crippled savings institutions. The agency closed or reorganized 747 institutions holding assets of nearly $400 billion. It did so by seizing the assets of troubled savings and loans, then reselling them to bargain-seeking investors. By 1995, the S.& L. crisis had abated and the agency was folded into the Federal Deposit Insurance Corporation, which Congress created during the Great Depression to regulate banks and protect the accounts of customers when they fail. Carl Hulse and David M. Herszenhorn contributed report- ing.