He called the risk of the financial institutions failing "unacceptable" for an economy battered by housing and credit crises.

"Allowing the companies to fail or further deteriorate would damage our home mortgage market, and could weaken other credit markets that are unrelated directly to housing," Mr Bush said in a statement.

"Americans should be confident that the actions ... will strengthen our ability to weather the housing correction and are critical to returning the economy to stronger sustained growth."

The Bush administration announced it was taking control of the two institutions to avert the potential for major financial turmoil.

The companies, which together own or guarantee about five trillion dollars in home loans, about half the nation's total, have lost 14 billion dollars in the last year and are likely to pile up billions more in losses until the housing market begins to recover.

Both companies were placed into a government conservatorship that will be run by the Federal Housing Finance Agency, the new agency created by Congress this summer to regulate Fannie and Freddie. The executives and board of directors of both institutions are being replaced.

In a statement, the president called the moves temporary until the appropriate role for the companies can be determined.

He said they must be reformed so that "they do not pose similar risks to our economy or the financial system again."

Treasury Secretary Henry Paulson said the actions were being taken because the failure of either of the mortgage companies "would cause great turmoil in our financial markets here at home and around the globe".