Treasury Secretary Timothy Geithner on Wednesday extended the government's $700 billion financial bailout fund to October next year, saying the economy still faced significant challenges.

Geithner, in letters to congressional leaders, pledged to deploy no more than $550 billion from the Troubled Asset Relief Program, allowing for some of the unspent funds to reduce budget deficits.

The extension, opposed by many Republicans, will allow the Obama administration to tap the financial rescue program for further efforts to fight home foreclosures and to ease credit access for small businesses as it seeks to spur job growth.

This extension is necessary to assist American families and stabilize financial markets because it will, among other things, enable us to continue to implement programs that address housing markets and the needs of small businesses, and to maintain the capacity to respond to unforeseen threats, Geithner told House Speaker Nancy Pelosi and Senate Democratic leader Harry Reid.

Congress created the program last year in the throes of the financial crisis. Under the law, Geithner had to decide by December 31 whether to extend the program to October 3, 2010, or let it expire -- a move that would have forfeited about $330 billion in funds that have not been disbursed.

But Geithner warned that withdrawing programs aimed at containing the crisis too early could prolong the economic downturn.

Too many American families, homeowners and small businesses still face severe financial pressure, he said. Further, the recovery of our financial system remains incomplete. And near-term shocks to that system could undermine the economic recovery we have seen to date.

Republicans immediately criticized the decision, arguing that the TARP program should die and unspent funds be returned to taxpayers.

Democrats love the idea of using TARP as a piggy bank for more and more federal handouts, said Senator Judd Gregg of New Hampshire, the top Republican on the Senate Budget Committee.

Using TARP authority for any purpose other than purchasing risky assets from troubled financial institutions to address an emergency in our financial system is inappropriate and illegal, Gregg added.

REPAYMENTS, DEFICIT REDUCTION

Geithner said the Treasury expects up to $175 billion in repayments from bailout recipients by the end of next year, with substantial additional repayments thereafter.

These funds, along with the $150 billion in TARP resources that will not be deployed, should allow us to commit significant resources to pay down the federal debt over time and slow its growth rate over time.

The Obama administration has said it expects the program will ultimately cost U.S. taxpayers at least $200 billion less than the $341 billion it had projected in August.

This includes $25 billion of potential costs from commitments that will be made next year, commitments in 2010, the majority of which would come from mitigating foreclosure for responsible American homeowners, Geithner said.

He said the new commitments would be limited to the housing market, capital for small banks and other efforts to boost small business lending, and increased support for the Federal Reserve's Term Asset-Backed Securities Loan Facility, which has been credited with reviving securitization of consumer, small business and commercial mortgage loans.

The decision came as a TARP watchdog group, the Congressional Oversight Panel, released a report saying that the program had failed to resolve key problems in the financial system, citing toxic assets still weighing down bank balance sheets, a sharp contraction of credit and the moral hazard associated with bailouts.

It credited the program, which has helped prop up big financial firms like Citigroup and insurer AIG, with helping to stabilize financial markets, but said it was doing too little to stem home foreclosures, which could reach 13 million over the next five years.

The panel's chairman, Harvard Law School professor Elizabeth Warren, said the Obama administration would have to seek congressional approval if it wants to use any funds for jobs programs outside the financial sector.

The program is not simply a slush fund that can be used on anything anyone wants to do, no matter how worthy, she told CNBC television.

(Editing by Andrea Ricci)

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