President Bush offered a vigorous defence of the free market system today but conceded that there should be reforms to correct the root causes of the global financial crisis.

On the eve of a meeting of G20 leaders in Washington, Mr Bush was to deliver a keynote speech in the heart of New York's Wall Street, at Federal Hall, the building which housed the first US Congress and George Washington's inauguration back in 1789.

According to an advanced copy of his remarks, he appeared to be keen that this weekend's financial summit does not adopt too interventionist an approach to the banking meltdown. “The crisis was not a failure of the free market system and the answer is not to try to reinvent that system,” Mr Bush will say. "Government intervention is not a cure-all."

The first issue on the agenda of the summit, dubbed Bretton Woods II, is reform of the international financial system adopted in the dying days of the Second World War. “While reforms in the financial sector are essential, the long-term solution to today’s problems is sustained economic growth,” Mr Bush will say. “And the surest path to that growth is free markets and free people.”

He called for the leaders of the G20 – from major industrialised nations and newly industrialised nations such as Brazil, India and China – to consider improving accounting rules for securities as well as reforming Bretton Woods institutions like the International Monetary Fund and World Bank.

Figures released today showed just what the policymakers are up against. More than 500,000 Americans lost their jobs last week, representing the fastest rise in US unemployment since the terrorist attacks of 2001.

Around 6.5 per cent of the American workforce are without a job and the new jobless claims data is likely to help propel that rate above 7 per cent by the New Year. According to official statistics published by Washington's Labour Department, 516,000 Americans filed new claims for unemployment benefit last week, 32,000 more than the week before, and well above Wall Street expectations of 480,000.

The numbers, which one Wall Street economist described as "awful" are the latest sign that America has been taken by surprise at the astonishing speed that the US recession is spreading across the country.

Mr Bush's Treasury Secretary, Hank Paulson, announced a change of course on the Administration's $700 billion bank bailout plan. He said that the fund would not now be used to buy up "toxic assets" and would focus on a $250 billion project to recapitalise banks to help maintain confidence in the system.

Mr Paulson's critics say that he should be impose more restrictions on those share purchases to ensure that banks start lending again, instead of simply hoarding the money or using it to buy up rival banks.

Congress today started examining whether even bigger changes should be made in the face of the deteriorating economy and soaring mortgage foreclosures.

The debate may not be resolved until President-elect Barack Obama takes office on January 20, after which he is expected to more closely align his policies with those of his congressional allies.

In anticipation of the change of administrations, Democrats were holding hearings in both the House and Senate today, examining various aspects of the financial crisis.

The House Oversight Committee was examining the role that hedge funds may have played in recent market turbulence. Among those scheduled to testify was the billionaire investor George Soros, chairman of Soros Fund Management.

Also today, the Senate Banking Committee was to hear from executives of a number of financial institutions including Bank of America, JPMorgan Chase and Wells Fargo on the issue of how the bailout plan is operating and particularly whether the government should be requiring more commitments on the use of the money to address the problem of mortgage defaults.

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