It happened again. For the third time in two weeks, President Bush reassured investors that the US economy is sound with corporate health improving - and stock markets sank.

The Dow Jones industrials slumped on Monday immediately after he spoke, to close down 234.68 points at 7784.58. It now has tumbled 16 per cent since Bush first vowed on July 9 and again on July 15 to "do everything in my power to end the days of cooking the books, shading truth and breaking our laws."

What is becoming increasingly clear, some market analysts and participants say, is that fighting words and quick Congressional fixes are not working. Instead, Wall Street may require a major overhaul of its regulatory structure and some new policies from Washington to cure what ails it.

"Speeches have not worked. It is time to see if actions will speak louder than words," wrote a former Fed vice chairman, Alan Blinder, in the Sunday New York Times.

To be sure, President Bush has called for a doubling of prison terms for corporate fraud and a financial crime SWAT team. Next month, chief executive officers must personally vouch to the SEC that their financial statements are accurate, and Congress is toughening laws on corporate accountants.

Yet the relentless selling on Wall Street, which is wiping out so much wealth that it raises concern over the economic recovery, has some analysts now talking of more radical steps.

"Even though we pride ourselves on having modernised the framework, in many ways we still regulate and manage our financial system with tools from the 1930s," said Thomas Schlesinger, analyst at Financial Markets Center in Virginia.

"And in many ways it is a weaker regulatory system than it was 60 years ago," he added.

Schlesinger questions whether the financial modernisation reforms of the 1990s, which opened the door to huge financial conglomerates regulated loosely by the Federal Reserve, may have paved the way for Enron and WorldCom-style disasters.

For example, congressional investigators are probing whether major banks provided Enron with billions of dollars in loans disguised as energy trades.

Favourable loans from banks were exactly the type of problem that contributed to effervescent stock prices and the 1929 stock market crash. The Depression-era Glass-Steagall Act that split up commercial and investment banking was supposed to stop such abuses. But in the 1990s, regulators dismantled many of those barriers and allowed these banks to be owned by the same parent company.

"I do think more chickens are going to come home to roost because of Glass Steagall's repeal, and there will be more questions to be asked of the Fed in the Enron case," he said.

Not everyone shares these fears, with some business leaders and politicians warning against over-regulation. Yet talk persists over whether enough is being done. One international hedge fund manager said economic policy also needs a shake-up.

The rout in stocks and the falling dollar - down 13 per cent on a trade weighted basis this year - signal that Americans no longer can expect to borrow cheaply from the rest of the world to finance huge budget and trade deficits.

"President Bush and Chairman Greenspan are doing the best job possible given the circumstances. The one thing that they might consider doing is to begin to talk honestly about rebalancing the economy from consumption-led growth toward savings and investment," the hedge fund manager said.

But these changes may prove a tall order for Bush ahead of the November elections. Toughening his regulatory stance risks alienating major Republican contributors in US business. To abandon tax cuts and urge Americans to stop spending to help finance the twin deficits would threaten a shaky recovery.

Thus Bush has resorted to words. He has praised the vitality of the American economy and blamed a few bad apples in corporate boardrooms for the instances of malfeasance.

Federal Reserve Chairman Alan Greenspan also has little leverage right now. His main tool for restoring market confidence - lowering interest rates - would risk spreading panic worldwide by sending the message that things are much worse and hence the recovery much shakier than most think.

Moreover, with benchmark short-term rates already at four-decade lows of 1.75 per cent, it is questionable just how much of an economic boost further rate cuts would provide. A booming housing market scarcely needs the help of lower mortgage rates and consumer spending is holding up so far.

So the leaders are boxed in. Noting that markets dropped after both Bush and then Greenspan remarked that the economy's underpinnings are sound and predicted three per cent-plus growth this year, Blinder said that demonstrates words are not enough.

"The markets are clamouring for decisive government actions now," Blinder wrote.

Schlesinger agrees. "There is a substantial policy failure in predictable unwillingness of a Republican administration to come out strongly in favour of tougher supervision," he said.

Like President Theodore Roosevelt, a Republican who angered big business by breaking up Standard Oil, Bush may have to take bold steps.

"Eventually, if we see a few more Adelphias, Tycos, WorldComs and a dollar nose dive, then I would not be surprised to see him turn into a Roosevelt," Schlesinger said.