WASHINGTON -- In an extraordinary response to the escalating financial crisis, Treasury Secretary Henry Paulson Jr. yesterday said the government would buy direct stakes in banks and other financial institutions for the first time since the Great Depression.

Mr. Paulson had initially dismissed the idea of taking equity stakes in crippled banks, and his change of heart may reflect a growing conviction that the severity of the credit crisis warrants a more direct approach. The Treasury plan aims to help banks rapidly shore up their dwindling capital, so they are more willing to lend to businesses, individuals and each other.

The announcement followed Wall Street's most tumultuous week ever, including a historically volatile session yesterday that saw the Dow Jones Industrial Average whipsaw over a range of 1,000 points. The Dow fell for an eighth straight day and posted its biggest weekly loss in its 112-year history.

Mr. Paulson said the Treasury Department was working on a plan to buy equity in "a broad array of financial institutions," using some of the $700 billion in the financial rescue package approved by Congress last week. The equity would be in the form of nonvoting shares, a move which may temper the government's ability to meddle with management.

The Treasury secretary made the announcement after emerging from a meeting of finance ministers and central bankers of the world's leading industrial democracies. Following the first day of their two-day meeting in Washington, the Group of Seven issued a five-point plan of action, promising "urgent and exceptional action" to address the crisis. But while the finance ministers pledged to work cooperatively on the same goals, they did not commit to a specific plan.

That poses the possibility that disappointment over the limited scope of the communique will drive stock markets lower again Monday. Many economists and investment professionals have been hoping that the G-7 meeting would produce a concrete, coordinated international plan to address the spreading global credit crunch.

Mr. Paulson dismissed that suggestion. "Some in the press and some in the markets are naive if they think that different countries with different financial systems, economies in different stages of development ... and different political systems, different laws, are going to come up with precisely the same policy to deal with the issues," he said.

But he added that all participants at the meeting agreed that strong steps were necessary. "This is a period like none of us has ever seen before," he said. "What came out of the meeting is there weren't differences in what we need to do."

Treasury's equity-purchase program was widely favored by economists, who argued that it would be preferable to the approach of buying bad mortgage securities from banks, the centerpiece of the financial bailout bill.

"Buying mortgage assets is plagued with problems," said Columbia University Graduate School of Business Dean R. Glenn Hubbard, former chairman of President Bush's Council of Economic Advisers. Mr. Hubbard made his comment shortly before the Paulson announcement, but after it became clear that the secretary was leaning toward the new approach.

"It's very helpful that Treasury is pivoting in this direction," Mr. Hubbard said. "This is a crisis that policy can fix; it's not beyond our ability."

Mr. Paulson offered few details about the equity program, declining to say how much of the $700 billion would go to such purchases. He said officials were "working around the clock" to develop the program.

In recent weeks, the U.S. Treasury and Federal Reserve System have taken unprecedented steps to protect the economy from the effects of the global credit crisis. And much more aggressive steps are looming, say government and economic observers.

The Fed, for example, has moved to thaw out the commercial paper market -- the provider of short-term loans for companies ranging from massive conglomerates to provincial manufacturing firms. The central bank's announcement this week that it would create a "backstop facility" -- essentially a form of guarantee -- for commercial paper began to lower interest rates on the debt for some borrowers within a day or so.

Many economists and finance experts say the latest round of initiatives, along with those that are being telegraphed by government officials, suggest that policy-makers are pulling out all the stops in trying to unlock the credit crunch.

Some also suggest that the current approach still has several gaps -- including more direct efforts to shore up home prices and reduce foreclosures, and more coordinated international initiatives to restore confidence in the global banking system, largely by providing banks with capital and insuring deposits.

Many of the steps already taken involved authority that has existed, but was seldom used. Some, such as the Treasury's ability to take direct equity stakes in banks, involve new powers.

Other steps require explicit findings of an impending financial emergency.

A plan to let the Federal Deposit Insurance Corp. insure all bank deposits -- beyond the limit of $250,000 per depositor written into the economic stabilization bill earlier this month -- would require a multi-agency finding that "systemic risk" threatens the economy. But financial experts believe that it would go far in shoring up public confidence in the banking system, as well as giving banks more comfort about lending to each other.

In any event, obtaining the necessary findings from the Treasury, Fed and FDIC may not be much of an obstacle, given the urgent atmosphere in the financial markets.

Many experts praise Mr. Paulson and Federal Reserve Chairman Ben S. Bernanke for their creativity in addressing the crisis. "They've been creating and refashioning tools on a daily basis," said Cornelius Hurley, a Boston University banking and financial law professor. "It's been breathtaking to see them reach into their tool kit."

Few policy makers are as familiar with the size of that tool kit as Mr. Bernanke, a longtime student of Fed policy. Addressing an audience of economists in 2002, when he was a Fed governor but not yet chairman, Mr. Bernanke outlined the almost-unlimited authority of the Federal Reserve System to protect the U.S. economy from harm.

The central bank could inject money into the economy by purchasing almost any asset -- government bonds, corporate bonds, foreign debt or other assets -- to manipulate interest rates and capital flows. Even in the most extreme circumstances, he said, a determined central bank would "most definitely not run out of ammunition" to maintain economic activity even in harsh recessionary conditions.

But many observers say that, far-reaching as they are, the steps taken thus far don't adequately address the root cause of the credit crisis -- rising defaults and foreclosures on mortgages issued to over-extended borrowers, who are now financially strapped and unable to keep their homes under existing loan terms.

Although some homeowner relief has been enacted by Congress, the economy appears to be slowing sharply, and job losses are mounting. That has triggered calls for a bailout for Main Street, especially in light of a lingering public perception that the $700 billion rescue plan is a bailout for Wall Street.