The U.S. Treasury Department is likely to unveil as soon as next week a three-part plan to relieve the U.S. financial system of the toxic assets that have been clogging up the banks' balance sheets, a source familiar with the plan said on Saturday.

The government is planning to set up an entity run by the Federal Deposit Insurance Corp to provide low-interest loans to private capital to buy up the banks' soured assets, many of which are tied to mortgages and have tumbled in value, the source said.

The Treasury will hire outside investment managers to run public-private partnerships to buy up the troubled mortgages, with government capital matching private capital contributions, according to the source.

Finally, the Federal Reserve will expand its Term Asset-Backed Securities Loan Facility, known as TALF, to also buy so-called legacy assets, the source said. The legacy assets are older securities that have been causing much stress to the banking system and have not been eligible for the TALF before.

The source said the exact timing of when the Treasury will unveil the plan is unclear because Treasury would first like to resolve the issue of executive bonuses, which lawmakers are trying to restrain for institutions involved in government rescue efforts.

(Reporting by Karey Wutkowski, with additional reporting by Rachelle Younglai; Editing by Eric Walsh)