HONG KONG (Reuters) - The U.S. government is considering taking over Fannie Mae and Freddie Mac if their funding problems worsen, the New York Times said on Friday, causing shares of the mortgage finance companies to plunge.

Shares of Fannie fell 27 percent to $9.66 in pre-market trading, while shares of Freddie fell 35 percent to $5.18. Both have tumbled by well over 80 percent since August.

Fannie and Freddie are government-sponsored entities generally viewed as having the implicit backing of Washington, and considered the last bastions of support for a U.S. housing market in its worst downturn since the Great Depression.

They have been under fire this week as investors questioned the companies’ ability to raise enough capital to stay afloat.

The New York Times said the government is considering a plan that would place the companies into conservatorship, citing people briefed about the plan.

This would mean the shares would be worth little or nothing, and the losses on home loans they own or guarantee — half of all U.S. mortgages — would be paid by taxpayers.

Officials involved in the discussions said no action by the administration is imminent, and that Fannie and Freddie were not considered in crisis, the newspaper said.

A spokesman for Freddie Mac declined to comment. Fannie Mae and U.S. officials could not be reached for comment.

European bond fund specialists said the government could not allow the failure of the two housing market pillars.

“In a nutshell, they are simply too big,” said Phil Barleggs, Insight Investment’s head of fixed product management. “There will be a lot of political pressure to bail them out.”

The fate of Fannie and Freddie has ramifications far beyond the United States.

U.S. agency debt and agency-issued mortgage bonds held by foreign central banks swelled by $9 billion in the last week to a record $978.98 billion, up 18 percent so far this year.

The European Central Bank accepts Fannie and Freddie loans as collateral from commercial banks. It declined to comment on whether a possible U.S. government move would affect its collateral framework, although a spokesman said framework rules depended heavily on debt agency ratings.

The dollar initially gained on the report, government bonds fell and stock markets climbed as investors felt a sense of relief, having fretted about the fate of the mortgage lenders. That optimism was misplaced, analysts said.

“If the situation is that serious, the U.S. stock market is likely to fall further on risk aversion and on concerns of a massive new share issue to capitalize the mortgage firms,” said Hideki Hayashi, chief economist at Shinko Securities in Tokyo. “The expected volatility in the stock market should result in a weaker dollar.”

NO LONG-TERM CURE

A government rescue would mark the second time that Washington has stepped in to support the financial system since mounting U.S. subprime mortgage defaults swelled into a global credit crisis a year ago.

In March, the Federal Reserve backed a plan for JPMorgan Chase & Co to buy investment bank Bear Stearns Cos for a cut-rate price.

Bondholders have obligations that would theoretically have priority in any insolvency. However, the quasi-governmental status of Fannie and Freddie complicates matters.

“Based on the previous experience with Bear Stearns and JPMorgan, bondholders seem to be rewarded and shareholders are significantly penalized,” said Jimmy Koh, a Treasury economist with United Overseas Bank in Singapore.

“But this is a little more dicey because we’re not dealing with a bank, we’re dealing with an agency,” he continued. “If there is something seriously wrong, I really don’t know what happens. We’ve never seen anything like this before.”

News the government was considering direct action to save the companies boosted Asian, and initially European, stock markets. The dollar edged up against the yen having fallen all week in tandem with shares.

“Any drastic move like that will only provide some short-term relief and won’t be a long-term cure,” said Albert Hung, chief investment officer at Alleron Investment Management in Sydney.

The Bush administration had considered calling for legislation to give an explicit government guarantee on the $5 trillion of debt owned or guaranteed by the companies, the Times said. That was seen as a less attractive option because it would effectively double the size of the national debt.

Even before this week, the stock prices of the two government-sponsored mortgage finance companies have been pummeled this year after soaring delinquencies on home loans resulted in billions of dollars of losses.

This has spawned speculation about whether they can withstand more losses and need massive new capital to survive.