WASHINGTON–Treasury Secretary Henry Paulson's $700 billion (U.S.) proposal to stabilize the banking system may push the national debt to the highest level since 1954, threatening an erosion of foreign appetite for U.S. bonds.

The plan, which asks Congress for funds to buy devalued securities from financial institutions, would drive the debt above 70 per cent of gross domestic product and the annual budget gap to an all-time high, possibly exceeding $1 trillion next year, economists estimated.

"This is sobering, absolutely sobering, even to someone who doesn't drink," said Stan Collender, a former analyst for the House and Senate budget committees, now at Qorvis Communications in Washington.

At risk for the world's largest economy: a jump in interest rates prompted by the glut of additional Treasuries needed to finance the plan, and a diminished desire among international investors to add to their holdings. The dollar yesterday slid the most against the euro since the European currency's 1999 introduction.

Paulson is asking lawmakers to lift the legal ceiling on the federal debt to a record $11.3 trillion, from the current $10.6 trillion.

Treasuries fell in the past two trading days after Paulson said on Sept. 18 that a sweeping rescue was needed. Gross U.S. debt, which includes debt held by the public and by government agencies, this year reached about $9.6 trillion, or about 68 per cent of gross domestic product.

The Treasury is already borrowing to fund Federal Reserve efforts to inject liquidity into credit markets. Last week it announced sales of $200 billion in short-term debt.

The Treasury's potential use of all $700 billion to purchase impaired assets would raise the country's debt to more than 70 per cent of GDP. The last time American taxpayers owed as much was in 1954, when the nation was still paying down costs incurred during World War II.

"It's an alarming level of debt given that we're not fighting something like World War II," said Robert Bixby, executive director of the Concord Coalition, a non-partisan budget watchdog group.

The government reaching the requested debt limit would entail every man, woman and child in the U.S. owing more than $37,000 each. The median U.S. income last year was $50,233.

If Treasury spends the entire amount next year, as some economists expect, it would drive next year's budget deficit, now projected to be around $500 billion, to $1 trillion or more. Still, the money for the Paulson plan will go to buy assets at prices that many market analysts say are depressed. Though it's still far from clear what price the Treasury would pay for them, it's possible those assets could increase in value as the crisis recedes and, as was the case with the government's 1979 bailout of Chrysler Corp., taxpayers could ultimately profit.