The Treasury says the Tarp plan is the best response
A watchdog for the US's $700bn (£481bn) bail-out plan for banks, said some aspects could be "unfair" to taxpayers.
Neil Barofksy, the special inspector general for the Troubled Asset Relief Program (Tarp), has delivered a 250-page report to Congress on the plan.
Part of Tarp is a "Public-Private Investment Programme" to buy troubled mortgages and securities that have been at the root of the credit crunch.
But Mr Barofsky said taxpayer risk was many times that of the private parties.
He also warned that the initiative, which includes giving private parties government subsidies to buy the troubled assets, could lead to more scope for fraud.
The public-private partnerships - comprising Treasury, Federal Reserve and private investor money - could total $2 trillion.
Separately on Tuesday, the Treasury Department said it had sufficient funds left in the $700bn fund, with $109.6bn still remaining.
Officials predict the fund will increase by a further $25bn as some recipients of the aid pay back what they have been lent. This would boost what remains of the fund to $134.6bn.
Early next month results of the government's "stress tests" - to determine whether the biggest US banks have adequate capital - are due to be released.
And Treasury Secretary Timothy Geithner told the Congressional Oversight Panel that while he could not comment on the plight of individual banks but said that "the vast majority" of banks had enough capital
He added that the Tarp struck "the right balance" of letting taxpayers share the risk with the private sector, while private industry used competition to set market prices for the assets.
"If the government alone purchased these legacy assets from banks, it would assume the entire share of the losses and risk overpaying," Mr Geithner said.
"If we simply hoped that banks would work off these assets over time, we would be prolonging the economic crisis, which in turn would cost more to the taxpayer over time."
Difficulty in putting a value on banks' toxic assets was continuing to hinder their ability to lend and borrow, he added.
Those bad debts were "congesting" the US financial system, stopping credit from flowing normally again.
To encourage private investors to take part in the scheme, low-interest loans and guarantees will be offered to private investors via the Federal Reserve and the Federal Deposit Insurance Corp - a government agency that backs bank deposits.
This means that the private investors, which the US hopes will include private equity, individual investors, pension plans and insurance companies, will shoulder relatively little risk, with 93% borne by the government.
But Mr Barofsky has issued a warning about the disproportionate risk carried by the government and US taxpayers in comparison to the private partners.
"The sheer size of the programme... is so large and the leverage being provided to the private equity participants so beneficial, that the taxpayer risk is many times that of the private parties, thereby potentially skewing the economic incentives," his report stated.
The Treasury has committed $75bn to $100bn of Tarp money to the public-private programme and said the private sector would also contribute.
Treasury officials insist the programme is the best response to the troubled loans and securities clogging the system.
Mr Barofsky recommends that the Treasury should establish conflict of interest rules on public-private fund managers to prevent investment decisions that benefit them at the expense of the taxpayer.
He says the Treasury should also disclose the owners of all private equity stakes in a public-private fund.
His report also notes that the Treasury Department has refused to adopt the inspector general's recommendation that all recipients of Tarp money account for the use of government money received.
"In light of the fact that the American taxpayer has been asked to fund this extraordinary effort to stabilise the financial system, it is not unreasonable that the public be told how those funds have been used by Tarp recipients," the report stated.