The US government may be forced into a bailout of the two largest mortgage companies, FreddieMac and Fannie Mae, in a rescue package that would dwarf Britain's £50 billion bailout of Northern Rock.

Washington is considering a plan to put the two stricken lenders into " conservatorship" - an effective Rock-style nationalisation.

Freddie and Fannie's shares would be worthless, but the taxpayer would pick up the bill for any losses on the $5,000 billion (£2,500 billion) of debt owned or guaranteed by the companies.

That would be 50 times the size of the taxpayers' guarantee arranged by Chancellor Alistair Darling for Northern Rock's liabilities.

Freddie and Fannie are far more central to the American housing market than Northern Rock was in the UK. Effectively, they take on the credit risk to tens of millions of American homeowners' mortgages.

Concern has been growing about the firms' core business and the shares have been in freefall this week. Yesterday alone, Freddie fell 22% and Fannie crashed 14%.

In an echo of the Northern Rock crisis, the biggest single risk facing the pair is the loss of confidence of investors.

News of the conservatorship plan, which emerged in the New York Times this morning, lifted stock markets around the world today.

Although it would be disastrous for shareholders in the two businesses, it would help stave off a massive worsening of the mortgage catastrophe in the US.

Government officials told the New York Times that losses on mortgages the two firms own or guarantee could be "staggering". The companies own or guarantee about half the $12 trillion in outstanding US mortgages.

On top of this, Fannie Mae has $831 billion in company bonds outstanding and Freddie Mac has $644 billion.

News of the contingency plans comes just days after the Federal Reserve decided to keep its safety net for investment banks open "for as long as the turmoil persists".

That net was put in place to support the sale of Bear Stearns to JPMorgan.

The two are at the heart of the US mortgage industry and virtually every mortgage lender in the US relies on them to make the market operate smoothly.

Their operations are the lifeblood of the American housing market, providing the capital that banks and other financial institutions use to write new loans.

The credit idea that grew into a monster

Decades before Northern Rock thought mortgage securitisation was a good idea, Freddie Mac and Fannie Mae were playing the game.

Fannie, founded as part of President Roosevelt's New Deal in 1938, and Freddie, founded in 1970, exist to free up the US mortgage market and make it easier for people to get home loans.

By buying up back books of mortgages from banks and selling on the parcels as bonds, they leave lenders with more capital to offer cheap home loans. They take on the credit risk and guarantee the loans will be repaid even if the actual borrowers defaults.

A hugely successful idea, the pair have grown into monsters with massive liabilities. Although they are not government entities in the strictest sense and have a stock market listing, they could not be allowed to fail.