NEW YORK : Democratic White House hopeful Barack Obama Thursday vowed to clean up a "distorted" Wall Street, as his rival Hillary Clinton warned the US economy was heading for a Japan-style depression.

The Illinois senator touted his plan to stave off a looming recession, as economics became the prime battleground both in his tussle with Clinton, and the Democrats' evolving general election showdown with Republican John McCain.

In a major economic speech, Obama called for an additional stimulus package worth 30 billion dollars to stave off a recession and immediate action to save homeowners mired in a mortgage crisis.

"Under Republican and Democratic administrations, we failed to guard against practices that all too often rewarded financial manipulation instead of productivity and sound business practices," Obama said.

"We let the special interests put their thumbs on the economic scales," he said, in a presidential-style setting here, against a backdrop of US flags.

"The result has been a distorted market that creates bubbles instead of steady, sustainable growth; a market that favours Wall Street over Main Street, but ends up hurting both."

Clinton touted her own economic credentials as she attempts to overtake Obama in the Democratic White House race, coveting Pennsylvania, where she hopes blue-collar voters will power her to victory in a primary clash on April 22.

"We might be drifting into a Japanese-like situation," Clinton said in an interview with the Wall Street Journal, before making her own speech on the economy on Thursday.

"I don't think we can work our way out of the problems we're in in the broad-based economy with monetary policy alone. I think the Japanese tried that, and tried and tried that."

Starting in the early 1990s, Japan slipped into a paralyzing slump triggered by the collapse of a property market bubble and ensuing credit crunch.

With their economy only just emerging from the doldrums, Japanese leaders now say that the United States has much to learn from their debilitating experience.

Obama backed a proposal floated in Congress to provide incentives for lenders to buy or refinance existing mortgages, in an effort to help Americans facing foreclosure honour loans, at affordable prices.

Clinton's plan demands action to help homeowners restructure mortgages, removes legal curbs for lenders keen to relax loan terms and calls for a 30-billion-dollar stimulus package to help states fight foreclosures.

But presumptive Republican nominee McCain condemned the approach of both of his potential Democratic election rivals as a doomed attempt by the state to interfere in the market economy.

"What is not necessary is a multi-billion dollar bailout for big banks and speculators, as senators Clinton and Obama have proposed," the Arizona senator said in a statement.

"There is a tendency for liberals to seek big government programs that sock it to American taxpayers while failing to solve the very real problems we face."

Clinton and Obama have accused McCain of planning to prolong what they say are President George W. Bush's failed economic policies, which they argue created the crisis in the first place.

"He (McCain) said that the best way for us to address the fact that millions of Americans are losing their homes is to just sit back and watch it happen," Obama said while campaigning in North Carolina on Wednesday.

"We've been down this road before. It's the road that George Bush has taken for the last eight years," Obama said.

"Whether the rest of America is struggling with rising tuition or skyrocketing health care costs, plant closings or crumbling schools, the answer is always the same: 'You're on your own.'"

- AFP /ls