Plans are being drawn up in the US to create an agency to deal with the bad debt crisis in its financial institutions.

A meeting to discuss a response to the crisis arising from the severe price correction in the property market has taken place.

It was held between congressional leaders and US Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke.

It is envisaged that proposals will be drawn up by officials in the near future and will go to Congress to be passed as legislation.

US stocks rallied on rumours about the new plan, with the Dow Jones average recovering 3.86%.

Asian markets followed Wall Street's lead, gaining broadly after days of turmoil and brutal sell-offs.

The crisis, which began a year ago but intensified in recent weeks, was set off by sub-prime mortgages, which are loans to home-buyers with dubious credit that in many cases ended up in default.

The defaults drove down US house prices, reduced available cash and credit and left financial institutions around the world - which bought many of the loans as part of complex investment instruments - exposed to bad debt.

The crisis has led to the mergers or collapse of some of Wall Street's biggest names, including Bear Stearns, Merrill Lynch and Lehman Brothers. Morgan Stanley may also be hit.