By Kevin Drawbaugh and Richard Cowan

WASHINGTON (Reuters) - U.S. congressional leaders locked themselves behind closed doors on Saturday with the aim of nailing down a deal on a $700 billion (380 billion pound) bank bailout and halting a downward spiral in the worst financial crisis since the Great Depression.

Leading lawmakers, who huddled with U.S. Treasury Secretary Henry Paulson, said they hoped to reach an agreement to create a massive government fund to buy up distressed debt from financial institutions staggered by failed mortgages.

House of Representatives Speaker Nancy Pelosi said she hoped a deal would be clinched on Saturday so Congress could act as early as Sunday with the goal of preventing a repeat of last week's white-knuckle ride in the financial markets.

But House Republicans, who had thrown talks into disarray on Thursday, said they still wanted to see Wall Street pay more of the cost and were less concerned about reaching a deal before Monday's opening bell.

"We're not moving on any kind of artificial timeline. We're moving towards the very best solution in the shortest period of time we can get to the very best solution," said Rep. Roy Blunt of Missouri, the chief negotiator for House Republicans.

The urgent background to the debate remained fear-wracked financial markets after big banks teetered, collapsed or refused to lend money to each other. Central banks have been forced to pump liquidity into the markets to try to prevent them from seizing up and bringing the economy to a halt.

Regulators seized savings and loan Washington Mutual Inc on Thursday in the biggest bank failure in U.S. history, selling its assets to JPMorgan Chase. In a reflection of the latest Wall Street shakeout, Washington Mutual filed for bankruptcy in a Delaware court on Saturday.

Meanwhile, published reports said Wachovia Corp, the sixth-largest U.S. bank, began merger talks with potential partners after a 27-percent drop in its shares on Friday.