The United States has made clear progress in steadying its financial system, thanks in part to a $700 billion bailout fund authorized by Congress, but the rehabilitation process still faces many challenges, Treasury Secretary Henry Paulson said on Friday.

"The very clear purpose of the TARP was to deal with the stability of our financial system. We have made real progress in dealing with financial stability, but there are going to be many months of challenges ahead," he told reporters after the fifth round of the Sino-American "Strategic Economic Dialogue."

Paulson has expressed opposition to using the Troubled Assets Relief Program to bail out the U.S. auto industry, but he said it would be wrong to allow one of Detroit's Big Three car makers to go under.

"The failure of one of the auto makers right now would not be a good thing. It would be a bad thing," he said.