After struggling with little success to stem a financial panic, US authorities were eyeing the possibility of direct capital injections to troubled banks as a means of shoring up a fragile system.

Such a move, already announced by British authorities, would give the government special shares of the banks in exchange for helping boost badly needed capital in an effort to unclog credit markets, analysts said.

Treasury Secretary Henry Paulson said Wednesday this is an option authorised by emergency legislation giving the administration 700 billion dollars to buy up distressed assets from a real estate meltdown.

"Wc will use all of the tools we've been given to maximum effectiveness, including strengthening the capitalization of financial institutions of every size," Paulson said.

John Ryding at RDQ Economics said such a move would help stabilise the banking system and go a long way toward easing the crisis.

Ryding said the move announced by British Prime Minister Gordon Brown, who has urged other governments to take similar steps, would likely be discussed by the Group of Seven finance chiefs gathering in Washington this week.

"We hope his Chancellor Alistair Darling is an effective /narketer of these ideas in Washington," Rydingsaid.

Senator Charles Schumer also urged the government to

consider this type of action.

"London's response to the turmoil in its financial markets is something we should consider here," Schumer said.

"Many experts agree that recapitalizing US banks directly would be an effective and less costly way to address the frozen credit markets. Under this plan, the government would receive equity stakes in return for providing capital or liquidity. This would allow taxpayers to share in any upside potential of our nation's banks."

Meanwhile, Iceland's government nationalised tire country's biggest bank Kaupthing on Thursday, just days after the second and third biggest banks

were brought under state control.

"Based on new legislation, the Icelandic Financial Supervisory Authority (FME) proceeds to take control of Kaupthing to ensure continued commercial bank operations in Iceland," the authority said in a statement as Iceland's economy verges on collapse amid the global financial crisis.

The move was aimed at "guaranteeing a functioning domestic banking system," it said.

Iceland’s parliament on Monday adopted emergency laws to save the financial sector and ward off national bankruptcy, allowing the government to take control of all

banks and financial bodies, take over assets, merge institutions and force institutions to declare bankruptcy.

The government nationalised Iceland's second- and third-biggest banks Landsbanki and Glitnir earlier this week.

As was the case with those banks, "domestic deposits are fully guaranteed" for Kaupthing’s customers, the Financial Supervisory Authority said, adding that the bank's domestic branches, call centres, cash machines (ATMs) and internet operations would be open for business as usual.

However, Kaupthing's operations in Britain, Finland and Sweden were halted.