The world is likely headed for a deep recession despite the European-led plan to bail out banks hit by the credit meltdown, the US economist who won the 2008 Nobel prize for economics said on Monday.

Paul Krugman, an economics professor at Princeton University and columnist for The New York Times, said the plan to recapitalize banks has the potential to heal financial institutions, unlike the US-led plan to buy bad debt that preceded it.

The US Treasury Department unveiled yesterday a $250 billion plan to purchase equity stakes in financial institutions along with a three-year guarantee of bank-to-bank lending, according to a financial policy source familiar with the plan.