WASHINGTON (Reuters) - The Bush administration and Congress on Sunday ramped up talks on an unprecedented $700 billion bank bailout as they battled the clock to prevent further financial market turmoil that risks hurtling the economy into a deep and damaging recession.

The plan for the largest-ever bank rescue would give sweeping powers to the U.S. Treasury to buy up toxic mortgage-related debt from financial firms, including U.S. subsidiaries of foreign banks.

Democratic leaders in Congress promised swift action, but also want to throw a lifeline to homeowners, not just Wall Street. With the economy issue No. 1 in an election less than six weeks away, lawmakers are striving to get a plan in place by week’s end, fearful that delay could send markets reeling.

“This is a new phenomenon for every major player in this place and there are no dress rehearsals. That is why the market is so jittery. This has to work the first time,” said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.

Two key questions remained unanswered even after Treasury Secretary Henry Paulson appeared on four television talk shows to press his case for emergency action. What price will the United States pay for these toxic debts, which have spawned the worst financial storm since the Great Depression? When will it start buying them?

“I’m confident that the credit market will improve but it will improve slowly. It just seems a lot of details have not been answered yet,” said Jack Ablin, chief investment officer with Harris Private Bank in Chicago.

Paulson painted the proposed market intervention as a necessary evil, arguing the consequences of inaction would be so dire that the large burden on taxpayers would be worth it.

“This is not something that we wanted to do. This was something that was very necessary,” Paulson said on the NBC Sunday program “Meet the Press.”

“We did this to protect the taxpayer.”

DEMOCRATS SEEK AID FOR MAIN STREET

Democrats, who control both chambers of Congress, began to swap proposals with the Treasury in a bid to ensure any rescue plan balances Wall Street’s interests with those of Main Street, while putting checks on the nearly unfettered power the administration sought for the Treasury secretary.

“Democrats believe a responsible solution should include independent oversight, protections for homeowners and constraints on excessive executive compensation,” said California Democratic Rep. Nancy Pelosi, the Speaker of the House of Representatives.

A list of proposed changes given to Treasury by the staff of the House Financial Services Committee sought limits on the compensation of executives of firms offloading assets, greater efforts to stem foreclosures, and oversight by the Comptroller General -- the government’s main auditor.

“It’s ... hard to tell the average American that we’re going to continue to have foreclosures that destabilize neighborhoods and deprive cities of revenues they need, but we’re going to buy up the bad paper,” committee Chairman Barney Frank said on CBS’ “Face the Nation.”

There was similar sentiment among Democrats in the Senate.

“We totally understand the gravity of the moment ... but you cannot just turn over $700 billion of taxpayer money and not insist that the taxpayer is going to be protected,” Senate Banking Committee Chairman Christopher Dodd told reporters.

Dodd and New York Sen. Charles Schumer, a member of the Senate Democratic leadership, both said having the government receive warrants to buy equity in companies selling off assets could protect taxpayers. “I’m looking at something, and I’ve talked to Paulson about this -- warrants that would put the federal government first,” Schumer said on “Fox News Sunday.”

OVERCOMING DIFFERENCES

Even as negotiations got under way, Schumer and Senate Republican Whip Jon Kyl predicted lawmakers would quickly resolve their differences and were likely to pass a bill by week’s end.

“The chances are better than 50-50 that we will get it done by the end of the week,” Kyl said on Fox.

Paulson said the final cost of the bailout should fall well short of the $700 billion initial price tag since the government would be able to hold the debt until markets stabilize and prices recover.

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“This is the least costly path,” he said on CBS.

If the Treasury tapped its full authority, the bailout would put every man, woman and child in the United States on the hook for more than $2,000. To cover the cost, Treasury asked Congress to hike the government’s debt limit to $11.3 trillion from $10.6 trillion.

The administration and Federal Reserve have already taken several other emergency steps to try to prevent growing credit strains from engulfing the entire financial system and economy. A $700 billion fund would push the total pledged to combat the crisis to $1.8 trillion, or $15,000 per U.S. household.

HEDGE FUNDS NEED NOT APPLY

Initially, the Treasury proposed buying assets only from companies based in the United States, but Paulson laid out the case for a broader mandate to ensure credit was flowing.

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“If a financial institution has business operations in the United States, hires people in the United States, if they are clogged with illiquid assets, they have the same impact on the American people as any other institution,” he said on the ABC program “This Week.”

The Treasury chief confirmed that hedge funds -- investment vehicles for the wealthy -- would not be eligible.

While aimed at mortgage assets, the administration’s plan would even let the Treasury acquire assets from nonfinancial firms and assets not tied to mortgages if needed to promote market stability.

The bailout plan follows a wrenching week that transformed Wall Street with Lehman Brothers’ failure, the agreed sale of Merrill Lynch & Co and a government takeover of ailing insurer AIG. It was also possible that within days, Morgan Stanley -- one of the two remaining U.S. investment banks -- would accept a partner.

FOCUSING ON TROUBLED HOME LOANS

The plan was hatched amid grave concerns that other major banks could collapse and that credit markets were close to freezing, threatening the U.S. and global economy.

“We have a global financial system and we are talking very aggressively with other countries around the world, and encouraging them to do similar things, and I believe a number of them will,” Paulson said on ABC.

Lawmakers said Paulson and Fed Chairman Ben Bernanke had offered starkly grave assessments of the economic cost of inaction in private briefings. “What they told us was the contagion here and the depression in the market was such that you were going to see a shutdown of the lending businesses not just on Wall Street” but for all Americans, Frank said on CBS.

Bernanke on Sunday was talking by phone and meeting in person with Treasury officials and lawmakers, while Paulson also was working the phones as counterproposals emerged.

Financial markets responded positively last week as news of a large-scale financial bailout spread. Stock markets worldwide added more than $1.5 trillion in value on Friday, the largest one-day advance ever and a sign of the vital importance of the plan to global markets and investor confidence.

It was still unclear, however, whether the bailout would be enough to pull the U.S. economy out of the doldrums.

“I won’t bet against the American people ... We will work through this,” Paulson said on NBC. “I wouldn’t bet against the long-term fundamentals of the U.S. economy.”