The argy-bargy over the US government's planned rescue package for financial institutions erased recent gains by Australian stocks Friday.

The ASX 200 had fallen 87 points, or 1.7 per cent, to 4,839 by mid-afternoon.

Prices were dragged down in thin trading as investors waited for US politicians to thrash out the terms of the bailout package worth up to 700 billion US dollars.

"Overall, it's really directionless trading," Man Financial broker Anthony Anderson told The Australian newspaper. "Traders are keen to buy the banks but not while uncertainty surrounds them."

The banks are likely beneficiaries of any lift in the market because their lending rivals, mortgage brokers like Aussie Home Loans, have lost business to them as credit has become more expensive and harder to get because of the global financial crisis and liquidity crunch.

Aussie Home Loans founder John Symonds declared that the so-called low-doc loans that had made up 15 per cent of its lending book were "dead" because of the liquidity crisis. Those loans, made with little or no proof of borrowers' ability to repay them, now amounted to less than 2 per cent, Symonds said.

To ease the liquidity crisis, the Reserve Bank of Australia was busy Friday selling 10 billion US dollars to banks.