Barack Obama and John McCain set out their economic policies in their second presidential debate last night.

They clashed over the financial crisis but fought to show voters how much they cared about their deepening economic plight in their second presidential debate.

After days of intensely nasty campaign trail rhetoric, the two senators strolled onto the stage in Nashville, Tennesse, smiling broadly, and shook hands, both patting the other on the arm before their "town-hall" style debate.

John McCain was under intense pressure to throw his sliding campaign a lifeline, as he trails to Senator Obama by widening margins in national polls and in battleground states as time runs out before the election on November 4.

MR McCain immediately laid out a plan to buy up bad mortgages in the United States and renegotiate loans at diminished values to ensure people caught in the foreclosure crunch could keep their homes.

"Is it expensive? Yes. But we all know, my friends, until we stabilize home values in America, we're never going to start turning around and creating jobs and fixing our economy," he said.

Both candidates made clear efforts to speak to their audience directly, crossing the red-carpeted stage at Belmont University to stand a few feet away from the questioner, holding hand-held microphones.

"I understand your frustration and your cynicism," Obama said, like McCain looking individuals in the group of undecided voters posing the questions straight in the eye, and by extension addressing Americans watching in their homes on television.

The rivals laced their answers with attacks on each other's policies in the early exchanges, but also tried to keep their tones and body language positive.

Mr McCain accused MR Obama of "taking a hike" on looming problems of the Fannie Mae and Freddie Mac mortgage giants which had to be bought up by the government.

Mr Obama said he had to correct his republican rival's "history" and said he had personally warned about the approaching disaster. He used the financial crisis to tie Mr McCain to President Bush.

"I believe this is a final verdict on the failed economic policies of the past eight years promoted by President Bush and supported by John McCain," Mr Obama said.

The McCain campaign, sensing the fast-running electoral clock, made a strategic turn in the run-up to the debate, sharply attacking Mr Obama's character and suggesting he did not share basic American values.

Mr McCain's running mate Sarah Palin has led the Republican assault, charging the Democratic nominee with associating with terrorists - a reference to his past acquaintance with 1960s radical William Ayers.

Mr Obama hit back by pointing to Mr McCain's ensnarement in a devastating 1980s financial scandal, when the savings of many retired people controlled by jailed savings and loans tycoon Charles Keating were wiped out.

The debate comes amid financial turmoil and growing concern about the economy.

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