Nov 2, 2006 — WASHINGTON (Reuters) - Democratic lawmakers warned on Thursday that U.S. reliance on foreign countries to purchase U.S. debt could lead to a financial crisis as they faulted the Bush administration's economic stewardship.

"If the United States does not begin to take steps to reduce its unsustainable dependence on foreign borrowing in an orderly way, there could be a run on the dollar that could precipitate an international finance crisis and a sharp increase in interest rates," a report issued by Democrats on the congressional Joint Economic Committee and House of Representatives Financial Services Committee said.

The report comes less than a week before elections in which control of Congress is at stake. It was also less than a month after President George W. Bush claimed victory in his effort to cut the U.S. budget gap in half from a once projected, but never reached, peak of $521 billion in fiscal 2004.

The Bush administration credited a surge in revenues that it pinned on strong economic growth for cutting the deficit to $247.7 billion in the fiscal year that ended September 30. The deficit is down from a record $412.7 billion in 2004.

The Democratic report, released by Sen. Jack Reed of Rhode Island and Reps. Carolyn Maloney of New York and Barney Frank of Massachusetts, said foreign ownership of outstanding U.S. debt had jumped to 42.1 percent from just 4.7 percent over the past 40 years.

Foreign ownership of Treasury securities rose to $2.2 trillion in August from $1.0 trillion in January 2001, it said, citing Treasury data.

During that period, China's holdings increased to $339 billion from $61.5 billion, while the holdings of members of the Organization of Petroleum Exporting Countries rose to $104.8 billion from $48.5 billion, the report said.

The report said foreign purchases of U.S. debt had likely dampened what otherwise would have been upward pressure on interest rates, but warned that investor sentiment could turn in a way that could hurt the economy.

The Democrats said it would take years of prudent fiscal policy to reduce reliance on foreign lenders and bring the federal debt to a prudent level.

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