By Donna Smith and Thomas Ferraro

WASHINGTON (Reuters) - Democratic leaders in the House of Representatives, seeking to stave off a recession that many fear is about to grip the United States, pushed on Monday for a second economic stimulus package and greater regulation of the financial markets.

With the U.S. presidential and congressional elections just three weeks away, they also said the U.S. Treasury Department needs to use the recently approved $700 billion bailout fund to purchase shares of troubled banks and that more must be done to regulate the financial industry.

"In many ways, this is the economic challenge of our lifetimes," House Democratic Leader Steny Hoyer of Maryland told a Capitol Hill news conference after a meeting with top fellow House Democrats and economic advisers.

Rep. Barney Frank, who chairs the House Financial Services Committee, said he planned to hold hearings soon on the need to regulate credit default swaps and derivatives.

"Failure to regulate the economy appropriately is what led to this mess," said Frank, a Massachusetts Democrat.

President George W. Bush, who helped lead the charge for the $700 billion rescue plan last month after the meltdown on Wall Street, has resisted mostly Democratic calls for a second economic stimulus package.

Early this year, before a steep drop in global financial markets and the teetering of several U.S. banks, Congress passed and Bush signed into law $168 billion stimulus that was credited with helping short-term economic growth.

House Speaker Nancy Pelosi, a California Democrat, said hearings would be held in coming weeks to determine the size and shape of a proposed second package. Democrats have discussed one of about $150 billion with construction projects and aid to states and the poor.

DEMOCRATS BLAME BUSH

Congressional Democrats, along with their party's presidential nominee, Barack Obama, have blamed the economic turmoil on Bush's fiscal policies of that last eight years, which have included reduced regulations and tax cuts that mostly helped the rich.

White House spokesman Tony Fratto dismissed Monday's Democratic "economic forum" on Capitol Hill as political theater.

"This meeting today is about campaign politics, not helping the economy. We'll see where we are next month when Congress returns" from its election recess, Fratto said.

Fratto said, "Democrats are not taking into account the enormous amounts of both fiscal and monetary stimulus that are just now working their way into the economy."

The meeting with Democratic leaders included former Treasury Secretary Lawrence Summers and Joseph Stiglitz, a White House adviser during Bill Clinton's presidency.

U.S. financial markets suffered one of their worst weeks in history last week, dropping nearly 20 percent, and fueling fears for a global financial meltdown.

Amid the economic chaos, U.S. automakers were discussing possible mergers, European governments announced rescue packages totaling hundreds of billions of dollars that were designed to combat the global financial crisis, in which credit markets have seized up.

Trading in the United States kicked off on a more positive note on Monday in reaction to Europe's moves, with the Dow Jones Industrial Average up nearly 6 percent at one point mid-morning.

(Editing by David Wiessler)