The plan would rely on the Federal Reserve and the Federal Deposit Insurance Corporation to supplement the government's $700 billion bailout fund, administration and industry officials said.
The uproar over the millions of dollars in bonuses for employees at troubled insurance giant American International Group (AIG) has dimmed prospects for getting more bailout money from Congress.
In the meantime, the US president stepped up his week-long defence of Timothy Geithner, saying he would not accept his resignation even if it was tendered.
Barack Obama said in an interview with CBS television on Saturday that if the treasury secretary tried to quit, he would tell him: "Sorry buddy, you've still got the job."
With public outrage over the AIG bonus scandal mounting and several politicians calling for Geithner's resignation, Obama was forced this week to repeatedly defend his treasury secretary, saying he had his complete confidence.
'Not a good sign'
While Obama has said Geithner's job is safe, some Washington pundits have noted it is not a good sign that the president has had to say it, and so often.
Thomas Palley, a Washington-based economist, told Al Jazeera that juding by the reception in the [US] media, Geithner's performance has been "pretty weak".
"He [Geithner] doesn't seem to have inspired. My own opinion is that Timothy Geithner is a very capable bureaucrat and he is carrying out the mission that he has set - that's president Obama's mission," he said.
"The question is: Who is providing the deep thinking about the economic architecture? He is not an economist; president Obama is not an economist."
"The question is: Who is providing the deep thinking about the economic architecture? He is not an economist; president Obama is not an economist"
Thomas Palley, Washington-based economist
Geithner, who has been in his job less than two months, has also faced criticism over his slow roll-out of plans to save the banking sector, which Obama said this week was key to staving off further financial calamity.
A source familiar with the bank bailout plan told Reuters on Saturday the Treasury Department would unveil a program next week aimed at cleansing toxic assets from bank balance sheets that have frozen up lending and fueled the recession.
The keenly awaited plan proposes setting up an entity the Federal Deposit Insurance Corp will use to offer low-interest loans to private interests for buying up banks' soured assets, many of which are tied to mortgages and have tumbled in value.
The Treasury Department will also hire outside investment managers to run public-private partnerships that could invest for potential profit in troubled mortgages, with government capital matching private capital contributions.
"The key is going to be if the government buys these assets quickly," said Mark Zandi, chief economist at Moody's Economy.com.
"The sooner they get these assets off banks' balance sheets, the quicker the system will find its footing and get the economy moving again."
Geithner's announcement last month of the financial rescue overhaul was widely panned by investors. The Dow Jones industrial average plunged by 380 points in large part because investors were disappointed that Geithner did not have more details.
'Wow' factor missing
Some analysts worry the market may once again be underwhelmed, in part because not enough resources will be devoted to the problem.
"The market is looking for a 'wow' factor where they can see the administration is finally doing enough," said Sung Won Sohn, an economics professor at the Smith School of Business at California State University.
The administration had said in February it needed more time to work out thorny problems that former Treasury Secretary Henry Paulson and the Bush administration had been unable to resolve.
Geithner's new plan is meant to attack what is widely viewed as the major failure of the bailout program so far: the inability to rid banks of a mountain of soured loans and troubled mortgage-backed securities.
Some industry officials said that participation by the private sector may be harmed because potential investors will now be worried that the government will change the terms of the deal or impose new restrictions because of the current political backlash against Wall Street.
Hedge funds and other big investors are likely to be more leery of accepting the government's enticements to purchase these assets, fearing tighter government restraints in such areas as executive compensation.
The effort to deal with toxic assets is the administration's latest initiative to tackle the financial crisis.
Other programs cover mortgage foreclosures; lending to small businesses; unfreezing the markets that support credit card, student loan and auto debt; and testing of the 19 largest banks to ensure they have enough reserves to withstand an even more severe recession.