US Banking Bail-out Teeters As Obama and Mccain Clash

American lawmakers inched closer to a deal on a $700bn bail-out of America's teetering banking industry last night after a day of political wrangling complicated by the involvement of presidential rivals John McCain and Barack Obama.

Congressional leaders pledged they would work through the weekend to find common ground, after Republicans defied their president by walking away from an initial agreement, fearing a voter backlash over the cost of rescuing Wall Street banks.

McCain had threatened on Wednesday to boycott the first presidential debate with Obama in Oxford, Mississippi, last night, but backed off at midday yesterday. He flew from Washington to Oxford for the debate, as did Obama.

Both presidential candidates are scheduled to return to Washington afterward. A rescue deal is unlikely until they return, with both parties keen to have their presidential candidates take credit - even if their roles were peripheral.

Last night, Gordon Brown said he was backing the bail-out after talks with Bush at the White House. Bush said: "The prime minister wants to know if the plan is big enough to make a difference, and if it is going to be passed, I told him it is big enough to make a difference, and it is going to be passed."

Brown responded: "Britain supports the plan. Whatever the details, it is the right thing to do to take us through these circumstances. America deserves the support of the rest of the world".

After initially falling sharply, shares on Wall Street surged on hopes that an emergency package would be finalized. The Dow Jones Industrial Average closed up 121 points at 11,143.

The fresh impetus came after a stalemate on Thursday when McCain and Obama joined talks at the White House.

Democrats accused McCain of grandstanding in Washington without playing a useful part in shaping the bail-out. Harry Reid, the Democratic leader in the Senate, said McCain's presence had been "harmful" rather than helpful: "All he has done is stand in front of the cameras. We still don't know where he stands on this particular issue."

McCain's campaign team said he had only agreed to go ahead with the debate because he was optimistic that significant progress had been made towards a deal. Obama told the press on his plane to Mississippi that progress on the bail-out legislation was being made. "I look forward to, after the debate, coming back to Washington and hopefully getting the package done," he said.

A tentative agreement struck on Thursday evaporated after a revolt by House Republicans.

With their resolve apparently bolstered by McCain's involvement, these Republicans came up with an entirely redrawn proposal which would require troubled banks to purchase state-sponsored insurance for bad debts rather than selling "toxic" mortgage-backed securities to the treasury.

The treasury secretary, Henry Paulson, who spent much of the day locked in negotiations with members of Congress, expressed reservations about meeting the rebels' demands, including for restrictions on pay-outs for failed executives.

Richard Shelby, the top Republican on the Senate banking committee, said the bail-out in its original form was unacceptable. "They're trying to push this in an emotional state, saying the sky's falling on our heads," he said. "Every time we have rushed to judgment in the past, we have paid for it."

But calls for urgent action were joined by two of America's most venerable economic figures. Alan Greenspan, the former Federal Reserve chairman and George Shultz, the Reagan-era treasury secretary, published an open letter saying: "We urgently advocate immediate, extensive action that would maintain the functions of credit markets and prevent a serious economic contraction."