The Federal Reserve on Wednesday ramped up its aid to the beleaguered U.S. economy, launching an effort to put more downward pressure on long-term interest rates and increase its support for housing.

Warning of significant downside economic risks, the U.S. central bank said it would launch a $400 billion program to twist its $2.85 trillion balance sheet more heavily toward longer-term securities by selling short-term government debt to purchase longer-dated Treasuries.

It also said would reinvest proceeds from maturing mortgage and housing agency bonds it holds back into the mortgage market, an acknowledgment of just how weak housing remains.

Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated, the Fed said in a statement after a two-day meeting. There are significant downside risks to the economic outlook, including strains in global financial markets.

The action by the policy-setting Federal Open Market Committee met with a mixed reception in financial markets. U.S. stocks sold off, apparently spooked by the Fed's dismal outlook, but prices for long-term government debt rose, pushing yields lower in a sign the Fed's action was more aggressive than some investors had expected.

The yield on the benchmark 10-year Treasury note fell to 1.871 percent, its lowest in more than 60 years.

Faced with a lofty 9.1 percent jobless rate and an escalating sovereign debt crisis in Europe, Fed officials had signaled they would seek to prevent already sluggish U.S. growth from weakening further.

But even as Fed Chairman Ben Bernanke indicated the central bank's reluctance to stay on the sidelines, his activism has become a punching bag for politicians as an election year nears. Top Republican congressional leaders wrote to Bernanke this week urging the central bank to resist further economic interventions, echoing criticism voiced by Republican presidential candidates.

Most Fed officials, however, believe that by shifting their bond holdings, they can encourage mortgage refinancing and push investors into riskier assets, such as corporate bonds and stocks, without stoking a run-up in consumer prices.

However, not all policymakers were on board with the Fed's latest action. The same three officials that had dissented against a decision in August to bolster a low interest rate pledge also opposed Wednesday's move.

Mohamed El-Erian, co-chief investment officer at bond fund PIMCO, said the dissents diluted the Fed's message about economic weakness. The outcome points to an even more divided FOMC, he said.

DOING THE TWIST

In its statement, the central bank said it will buy $400 billion in securities with maturities of six to 30 years by the end of June 2012, selling an equal amount of debt maturing in three years or less.

The Fed is not alone in its concerns. The Bank of England on Wednesday signaled it was ready to pump more money into the weakening British economy, potentially as soon as October.

Similarly, the Norwegian central bank held its main interest rate steady and signaled it might refrain from rate increases for longer than previously expected.

The U.S. economy grew at less than a 1 percent annual rate over the first half of the year and analysts have warned of a heightened risk of recession.

The Fed had already embarked far down one of the most aggressive monetary easing paths on record. It cut overnight interest rates to near zero in December 2008 and then moved to more than triple its balance sheet to $2.8 trillion through a series of bond purchases.

After its last meeting on August 9, the Fed said it expected to hold rates at rock-bottom levels at least through the middle of 2013, drawing the trio of dissents.

Critics claim the monetary easing campaign has failed to produce results and warn it could actually cause damage by fueling inflation and debasing the dollar.

We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy, Republican congressional leaders said in their letter to Bernanke, which they released on Tuesday.

The central bank's policies have also become a topic on the presidential campaign trail. Texas Governor Rick Perry, a leading Republican candidate, said any further Fed money printing would be almost treacherous, treasonous.

(Editing by Tim Ahmann)