Henry Paulson, the US Treasury Secretary, told lawmakers in Washington that his $700 billion bail-out fund should not be seen as the answer to all America's economic problems.

Addressing the US House Financial Services Committee, the former chief executive of Goldman Sachs, said that the rescue fund approved by Washington two months ago, must not be used to bail-out America's car makers, and should not be seen as a stimulus package to kick start the US economy.

He said: “It was intended to shore up the foundation of our economy by stabilising the financial system, and it is unrealistic to expect it to reverse the damage that had already been inflicted by the severity of the crisis.”

Mr Paulson also defended his recent decision to not use the fund - called the Troubled Asset Relief Program, or TARP - to buy distressed mortgage-backed securities but to use all of the cash to take direct equity stakes in troubled banks.

He explained: "While I understand the interest in spending TARP resources on other approaches, the efforts already under way will do more to prevent foreclosures than might have been achieved through very large purchases of mortgage-related securities through the TARP."

He said that by the time Congress had approved the funds, the financial crisis had spread globally and become so severe that "an asset purchase program would not be effective enough, quickly enough."

The 62-year-old came under fire after he expressed reluctance in using his taxpayer-funded programme to also meet the cost of rewriting American mortgages to help struggling borrowers stay in their homes.

Barney Frank, the Head of the Committee who is also a Democrat, told Mr Paulson that "the bill couldn't have been clearer" in its remit for being used to help reduce the number of borrowers face foreclosure.

Mr Paulson, who will leave office along with the rest of the Bush Administration in mid-January, said he would not spend the remaining half of the bail-out fund, instead saving it for the incoming Obama Administration to administer. It is quite feasible that under Mr Obama, the fund may end up being used to stem the number of property foreclosures.

Mr Paulson has said in the past that while he and President Bush both believe that it is not in the best interest of America to allow General Motors, Ford and Chrysler to fail, he reckons the most appropriate rescue package should be in the form of a new fund, established by Congress.

US stocks made modest gains as investors swung between Hewlett-Packard’s upbeat outlook and the depressing economic climate. The Dow Jones Industrial Average rose 151.71 points to finish at 8,424.75.

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