A second round of mortgage defaults - even more powerful than the sub-prime woes - will hit the US economy and lead to more bank closures and a prolonged recession, economists have warned.

It would deal a heavy blow to Chinese holdings of dollar assets and the country needs to take pre-emptive measures to ward off such risks, they have suggested.

Already, Citigroup Inc is in talks with the US government to hike the latter's stake in the struggling bank, whose share prices slumped to less than $2 last week from over $50 in 2007.