In new era, U.S. to buy $250 billion in bank stakes

NEW YORK (Reuters) - The United States ushered in a new era in banking on Tuesday with plans to take equity stakes worth up to $250 billion in financial institutions, an incursion into the private sector that U.S. officials called a regrettable last resort.

The U.S. government followed European powers that agreed to recapitalize their banks a day earlier, triggering a global stock market rebound that continued on Tuesday when Wall Street rallied 4 percent at the open before falling back on recession concerns. and the S&P 500 were down 2 percent in afternoon trading. Both indexes on Monday registered their biggest one-day point gain in the wake of last week's panic sell-off.

Prices for U.S. Treasuries fell as the bank rescue plan made them less attractive as a safe haven.

European shares closed 3 percent higher after Japan's Nikkei climbed more than 14 percent -- its biggest one-day gain in history.

U.S. bank stocks soared.

But the prospect of huge public stakes in private banks raised questions for European banks entering the new reality.

With three weeks to go before the November 4 U.S. presidential election, Republican candidate John McCain on Tuesday offered proposals to help investors rebound from stock market turmoil.

Democrat Barack Obama, ahead in public opinion polls, proposed a raft of relief measures on Monday.

Obama and McCain will hold their third and final debate on Wednesday night.

The crisis has provided a political boost for British Prime Minister Gordon Brown, who created the blueprint for the United States and other major economies to recapitalize their banks.

Brown, who must call an election by mid-2010, has cut his deficit in the polls to 10 percent from 28 percent.

The U.S. measures are intended to stimulate interbank lending and the commercial paper markets, whose stagnation may have already pushed the U.S. economy into recession. Former U.S. Federal Reserve Chairman Paul Volcker said the world's biggest economy was already in recession.

(Reporting by Reuters bureaus around the world; Editing by Brian Moss and Steve Orlofsky)