However, Mr Paulson added that the Treasury Department and the Federal Reserve would continue to monitor whether bad-debt purchases could "play a useful role" in the future.
Mr Paulson's comments did little to ease continuing investor jitters, and Wall Street's main Dow Jones index ended Wednesday trading in New York down 4.7%.
However, many analysts said he was right to backtrack on the plan to buy up the bad debts, saying it was difficult to see it being workable, and that simply buying up more banking stock was more straightforward.
"The best bet is just to give them [the banks] the capital and to let them absorb the losses anyway," said Rudy Narvas, senior analyst at 4Cast.
"That is exactly what it looks like is happening."
Mr Paulson's comments regarding America's three main carmakers - General Motors, Ford and Chrysler - are likely to have disappointed House of Representatives Speaker and leading Democrat Nancy Pelosi.
3 October - $700bn rescue bill passes through Congress
14 October - Plans announced to buy $250bn in banking stock
26 October - First $115bn spent buying shares in eight lenders
10 November - $40bn to buy stake in insurer AIG
She is now calling for the three firms - which are struggling against big losses and falling sales - to share $25m in emergency aid out of the $700bn financial sector bail-out fund.
There is, however, a great deal of opposition to a bail-out for the car industry.
"Once we cross the divide from financial institutions to individual corporations, truly, where would you draw the line?" said Jeff Sessions, Republican Senator for Alabama.
The call for help comes after General Motors (GM) announced a third-quarter operating loss of $4.2bn last week. The carmaker said it would run out of cash early in 2009 if market conditions did not improve.
GM also announced it would be forced to lay off 3,600 workers, and has since announced a further 1,900 job cuts.
Last week, Ford also reported a $2.98bn loss for the third quarter and said it would have to cut salary-related expenses in North America by 10%.
Sales at the two car giants have been hit hard as consumers tighten their belts for the impending recession. Sales at GM fell by 45% in October compared with the same month last year, while sales at Ford fell 30%.
Chrysler was also hit hard, with sales falling 35%.
At the start of October, President George W Bush signed legislation that gives GM and fellow US carmakers Chrysler and Ford access to $25bn of cheap government-backed loans to help them develop less-polluting cars.
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