"This needs to be big enough to make a real difference and get at the heart of the problem."
Paulson said that officials from the administration of George Bush, the US president, Congress and the Federal Reserve were working together on a number of plans to restore confidence in the markets.
"We are going to be coming to them [Congress] with a proposed legislative package and working with them to flesh out the details through the weekend and we're going to be asking them to take action on legislation next week," he said.
Nancy Pelosi, speaker of the US house of representatives, on Friday said Congress was "committed to quick, bipartisan action" on legislation to rescue Wall Street.
Bush, speaking at the White House after Paulson, said government intervention in the financial markets was essential and the risk "of not acting would be far higher".
"These measures will require us to put a significant amount of taxpayer dollars on the line. This action does entail risk, but we expect that this money will eventually be paid back," he said.
Financial analysts have been calling on the US to take action to ease the crisis.
William Browder, CEO of the investment group Hermitage Capital Management, told Al Jazeera: "It is a problem of global proportions and it is not just happening in one country. I suspect that this is not going to be the last big action that the regulators take."
Al Jazeera's John Terret, reporting from New York, said the news would bring confidence back to the markets.
"The government is moving now and taking the lead in all this, and that is going to shore up the confidence that has been lacking," he said. "This day might go down in history as the beginning of the end of the problem."
World stocks soared on Friday amid reports that the US government might buy up banks' bad debts.
The FTSEurofirst 300 index of top European shares jumped six per cent, or 1,127 points, in early trade on Friday following news the UK had imposed a ban on the short-selling of stocks and the US was considering a similar move.
Banking shares made the biggest gains with top names soaring by nearly a third in Britain.
In Asia, Hong Kong's Hang Seng Index rocketed to close 9.6 per cent higher, while Japan's benchmark Nikkei ended up 3.8 per cent on Friday after sliding 2.2 per cent a day earlier to close at its lowest level in more than three years.
Stock markets in Taiwan, South Korea, Singapore, Malaysia and Australia were also markedly higher.
In Sydney, Australian investment bank Macquarie Group saw its stock surge by as much as 51 per cent, its biggest one-day gain on record.
The upswing also followed a co-ordinated drive by central banks around the world to release $180bn to alleviate any credit crunch.
The move by the Bank of Canada, the Bank of England, the European Central Bank, the US Federal Reserve, the Bank of Japan and the Swiss National Bank is the fourth such concerted effort since the start of the credit crisis last year.
In Shanghai, China's main stock index surged 9.5 per cent - it's biggest one-day percentage gain ever.
Chinese investors got an additional boost from a government decision to eliminate a tax on share purchases and government plans to use an investment fund to buy shares in three major banks.
"I knew it would rise, but didn't expect it to jump so high," Zhao Yueming, a dealer at Cinda Securities, told the Associated Press.
"China's stock market is always crazy beyond people's expectations."
The bounce in Asia comes after a 410-point overnight gain on Wall Street following a late surge in the trading day on news that the US government might set up a central facility to take on banks' bad debts.
It was the Dow's biggest percentage point gain since October 2002 but still left the index down about 400 points for the week after routs on Monday and Wednesday.