The US government is backing away from its scheme of buying  “toxic” assets, according to media reports. US Treasury Secretary Hank Paulson had made the plan the basis of his $700 billion Troubled Asset Relief Programme.

“Our assessment at this time is that this is not the most effective way to use TARP funds,” Mr Paulson said. He said the $410 billion in uncommitted funds would be better spent on an expanded programme to recapitalise financial companies, support markets for securities backed by consumer debts and prevent foreclosures.

The Treasury Secretary said it was clear that the plan to buy assets would “take time to implement and would not be sufficient given the severity of the problem”. Capital injections offered a “more powerful” way to support the financial system. “I will never apologise for changing an approach or strategy when the facts change,” Mr Paulson said.

Mr Paulson said the Treasury was evaluating a programme in which the government would provide funds to match those that financial institutions were able to raise from private investors and said such a scheme could be open to non-bank financial firms.

But Mr Paulson signalled that Treasury would wait until it had time to evaluate the first round of recapitalisations before embarking on a second, which looks increasingly unlikely to happen before the next administration takes office.