Jan. 11 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson said the U.S. economy slowed ``rather materially'' at the end of 2007, and any stimulus package should be put into effect quickly.

``We are looking at things that could be done quickly,'' Paulson said. ``Time is of the essence.''

Paulson's comments, in an interview on Bloomberg Television's ``Political Capital with Al Hunt,'' were the clearest signs yet that the administration is likely to propose a package of tax cuts and other fiscal measures to spur growth in President George W. Bush's State of the Union address on Jan. 28.

Paulson, sounding more pessimistic than previously on the economy, said that consumers face a variety of challenges, including declining house prices, rising energy costs and a weaker job market.

``There are signs'' the economy ``is slowing down fairly rapidly,'' he said. ``If something were to be done here, I think the focus would be on something that's temporary and that could get done and make a difference soon.''

Democratic leaders in Congress have pledged to work with Bush on a package of measures to buttress consumer confidence and avoid a recession. A government official, who declined to be identified, said the administration is looking at tax rebates aimed at low- and middle-income Americans and tax breaks for business investment as part of a potential stimulus package.

Easier Path

Paulson, acknowledging that Bush can't convince the Democratic-led Congress to make his 2001 and 2003 tax cuts permanent, said that it would be easier to get agreement on temporary measures designed to speed help to the economy.

``If there is a stimulus, I think the purpose would be to help the economy this year,'' the former chief executive officer of Goldman Sachs Group Inc. said.

Economists from Harvard University's Lawrence Summers, a former Treasury secretary under President Bill Clinton, to Lawrence Lindsey, the former director of Bush's National Economic Council, have backed a budget package.

The fiscal steps would complement interest-rate cuts by the Federal Reserve. Fed Chairman Ben S. Bernanke signaled yesterday he is prepared to make deeper rate reductions, pledging ``substantive additional action'' to aid the economy.

Avoid Recession

Paulson said he expects the U.S. will avoid a recession, helped in part by record exports. Yet he acknowledged the U.S. economy is heading for tougher times.

``There are risks to the downside,'' he said.

Homebuilding has declined for seven straight quarters and Fed officials say it may take at least six more months before the industry rebounds. Paulson said the housing market poses the biggest threat to the economy and made clear he expects home prices to continue to fall.

``There's no doubt that this hasn't run its course yet,'' he said.

The unemployment rate rose to 5 percent in December, the highest in two years, from 4.7 percent the previous month. Paulson called the latest jobs numbers another challenge for the economy and consumers.

The economy has also been buffeted by losses in the banking and financial industry, as companies have been forced to write off billions of dollars on investments in mortgages and loans went bad.

Countrywide Financial Corp., the nation's biggest mortgage lender, agreed today to be taken over Bank of America Corp. after speculation surged this week the lender would be forced to file for bankruptcy.

Paulson declined to comment specifically on the merger. He did say the Treasury was encouraging banks and other financial institutions to strengthen their balance sheets by raising more money from investors so they won't have to cut back on lending.

To contact the reporters on this story: Kevin Carmichael in Washington at kcarmichael@bloomberg.netRich Miller in Washington at rmiller28@bloomberg.net.

Last Updated: January 11, 2008 16:29 EST