* U.S. Treasury revamps bank rescue plan, markets sag
* Public/private plan could buy $1 trillion in toxic debt
* Another $1 trillion to boost consumer, mortgage lending
* Treasury's Geithner: crisis will take time to resolve (Recasts first paragraph, adds quotes, details)
By Glenn Somerville
WASHINGTON, Feb 10 (Reuters) - U.S. Treasury chief Timothy Geithner on Tuesday unveiled a new bank rescue plan that would put $2 trillion to work mopping up bad assets and restoring credit, but stock markets plunged on fears it would not work.
Global markets had intensely awaited Geithner's ideas for a plan mixing private and public funding to stabilize a financial system tottering under the weight of bad mortgages, but were disappointed over the scant detail he provided.
The Dow Jones industrial average <.DJI> closed down more than 380 points or 4.6 percent in its biggest one-day percentage drop since Dec. 1, while prices for U.S. government bonds climbed as investors sought safety. The KBW index of bank stocks <.BKX> fell almost 14 percent.
Geithner said lack of public confidence in prior rescue efforts had made it all the more difficult to stop "a dangerous dynamic" in which a lack of credit undercuts the economy and leads to more weakness among banks, worsening the recession.
"This is very complicated to get it right," he said in an interview on Bloomberg Television. "We are going to try to get it right before we give the details so that we don't add further to uncertainty in these markets."
In a speech, on television and in Capitol Hill testimony, Geithner made his case for how the Obama administration plans to handle the roughly $350 billion left in a $700 billion financial bailout fund approved by Congress in October.
He studiously avoided saying whether the administration might have to ask Congress for more money to fix the banks, restore credit and counter recession, but did not rule it out.
"We're going to consult with the Congress carefully to try to make sure the world understands that the resources necessary to solve this will be available over time," Geithner told CNBC, adding:
"The important thing is that ... we send a basic signal, working with the Congress, that we will do what's necessary to fix this."
Market participants, however, were frustrated. "Investors want clarity, simplicity and resolution. This plan is seen as convoluted, obfuscating and clouded," said James Ellman, president of Seacliff Capital in San Francisco.
LEVERAGING PRIVATE MONEY
A centerpiece of the renamed "Financial Stability Plan" is a proposal to set up a public-private investment fund, in partnership with the Federal Deposit Insurance Corp, a bank watchdog, and the Federal Reserve, the U.S. central bank. For details see [ID:nN06446621].
Seeded with public money, it would leverage up to $500 billion -- and possibly as much as $1 trillion -- so that toxic assets can be purged from a weakened banking system.
Geithner told an invited audience at the U.S. Treasury that $50 billion in federal rescue funds will be used to try to stem home foreclosures and soften the crushing impact of the deep housing crisis now afflicting the entire economy.
The plan would also expand a Fed program aimed at expanding credit card, student, auto and small business lending.
The facility will grow from its current $200-billion limit to up to $1 trillion, thanks to a jump in Treasury funding to $100 billion from $20 billion. The lending program would be extended to cover a range of mortgage-related assets.
The Treasury also said it would continue to pump capital into banks, as the former Bush administration did, but Geithner said there will be conditions attached to ensure the money is lent and that top executives heed restraints on their pay.
In return for the capital, the government would receive preferred shares in the banks that could convert to common stock.
BANK FIX PART OF LARGER PLAN
Geithner said it was critically important to restore credit flows in order for a separate $800-billion-plus package of tax-cut and government spending measures to lift the economy.
Shortly after Geithner announced the plan, the U.S. Senate cleared an $838 billion stimulus plan, which needs to be reconciled with a separate bill approved by the U.S. House of Representatives.
The Treasury is tussling with the worst financial crisis since the Great Depression. Careless lending fueled a housing boom that has gone bust and dragged the U.S. economy and much of the rest of the world into deep recession.
President Barack Obama said on Monday that cleaning up banks' balance sheets was a priority and didn't rule out the possibility that it will take more money than the $700 billion Congress already has approved to complete the job.
"We don't know yet whether we're going to need additional money or how much additional money we'll need until we see how successful we are at restoring a level of confidence in the marketplace," Obama told a news conference. (Additional reporting by David Lawder and Mark Felsenthal; Editing by James Dalgleish)