By Jeremy Pelofsky

WASHINGTON (Reuters) - U.S. President George W. Bush on Wednesday signed into law a sweeping rescue package aimed at resurrecting the housing market from its worst slump since the Great Depression and stabilizing the two largest mortgage finance companies.

The new law launches a $300 billion government initiative to refinance troubled mortgages, and boosts oversight of Fannie Mae and Freddie Mac, which own or guarantee almost half the country's $12 trillion in home mortgage debt.

It expands a line of U.S. Treasury credit for the companies, and gives the government the option to take equity stakes if they ran into trouble.

Lawmakers ironed out the law over the past month to stem a crisis in investor confidence over the the two companies, which were created by Congress to keep mortgage money flowing. The companies are trying to strike a balance between expanding earning power and providing finance for the mortgage market against containing losses that have eroded their capital.

"We look forward to put in place new authorities to improve confidence and stability in markets, and to provide better oversight for Fannie Mae and Freddie Mac," said White House spokesman Tony Fratto.

Bush signed the legislation into law because it included numerous key housing reforms, including a stronger regulator of the two mortgage giants. The White House had originally opposed a provision that offers $4 billion in grants to states to buy and repair foreclosed homes.

The Bush administration for years advocated a smaller role for the companies, asserting that their management of trillions in assets placed too much risk on the U.S. financial system.

The bill underscores the importance of the companies, long criticized as private companies with an implicit guarantee from the U.S. government. The more explicit taxpayer backing put in place by legislation benefits holders of their $1.6 trillion in combined debt used to fund mortgage purchases.