Paulson says U.S. bailout still faces challenges

BEIJING (Reuters) - The United States has made clear progress in stabilising its financial system, but nursing it back to health will be a long haul, Treasury Secretary Henry Paulson said on Friday.

"We have made real progress in dealing with financial stability, but there are going to be many months of challenges ahead," Paulson told reporters after leading a U.S. delegation at two days of cabinet-level talks in Beijing.

Under the $700 billion (476.8 billion pound) Troubled Assets Relief Programme authorised by Congress, $250 billion has been committed for capital injections into U.S. banks in a bid to revive sluggish credit markets and restore confidence in the banking system.

Another $100 billion has been largely consumed by efforts to prop up insurer American International Group and Citigroup, as well as support the Federal Reserve's efforts to free up lending to consumers.

Paulson expressed confidence that he had enough fire power to finish the job of cleaning up a financial sector felled by a credit crisis that started in subprime mortgages and spread like wildfire throughout the economy.

"In terms of programmes we right now have under way, and thought given to programmes that might be useful in the future, we've got the capacity to deal with the challenges I see before us," Paulson said.

The Treasury chief said he had no timetable for drawing down the second tranche of the TARP.

"But, remember, Congress put a process in place, and if and when I see a need to draw that tranche down I'm confident that process will work," he said.

Paulson was speaking a day four senior Democrats sent a letter to President George W. Bush urging him to use the $700 billion bank bailout programme to help Detroit, which is lobbying for up to $34 billion in emergency government aid.