A report by the Government Accountability Office, the investigative arm of Congress, found that hedge funds' inclination to take substantial risks with increasingly large sums of money - and to leverage those bets - means losses can spread and be magnified throughout the financial system.

The report said banks eager to do business with hedge funds often are not critical enough when assessing the risks of their complex investment strategies.

The head of the Managed Funds Association, a trade group for hedge funds, said there are ways to fix the problems and said a committee appointed by President Bush will soon offer specifics. "Remedies may be found," said Richard Baker, a former House Republican from Louisiana.