Republican presidential candidate John McCain answers a questions as his Democrat counterpart, Barack Obama, listens during the debate at Hofstra University in Hempstead, N.Y., on Wednesday. (Ron Edmonds/Associated Press)

John McCain and Barack Obama squared off in the third and final U.S. presidential debate Wednesday night, with McCain decrying Obama's views on trade with Canada and his ties to "an old, washed-up terrorist."

He was referring to a neighbour of Obama's, William Ayers, co-founder of a Vietnam War-era radical group with penchant for bombing government buildings. "Mr. Ayers has become the centrepiece of Senator McCain's campaign over the last two or three weeks," Obama shot back.

McCain, the Republican candidate, spoke first, striking a populist tone: "Americans are hurting right now and they are angry .… They're innocent victims of greed and excess on Wall Street and also in Washington, D.C.," McCain said.

As he did a week earlier, he called for a $300-billion government program to buy mortgages, negotiate with over-stretched borrowers and enable them to keep their homes.

McCain, during the debate, called for a $300-billion government program to buy mortgages during the presidential debate. (Ron Edmonds/Associated Press)

Obama, the Democrat, agreed that mortgage debtors need help, but he said McCain's idea could be a giveaway to banks rather than homeowners.

He said McCain has been a staunch supporter of President George W. Bush on economic issues and is essentially proposing "eight more years of the same thing."

McCain said: "Senator Obama, I am not President Bush. If you wanted to run against President Bush, you should have run four years ago."

Canada got a moment in the limelight.

"I believe we can for all intents and purposes eliminate our dependence on Middle Eastern oil and Venezuelan oil," McCain said. "Canadian oil is fine.

"By the way, when Senator Obama said he would unilaterally renegotiate the North American Free Trade Agreement, the Canadians said: 'Yeah, and we’ll sell our oil to China.'

"You don’t tell countries you’re going to unilaterally renegotiate agreements with them."

Source of McCain's information unclear

It was unclear where McCain got his information about the Canadian response, which sounded more like something from the blogosphere than from an official Ottawa statement.

When the issue arose in February, Prime Minister Stephen Harper said it would be a bad idea to reopen NAFTA, and he doubted that a new U.S. president would do so.

"If any American government ever chose to make the mistake of opening that, we would have something we would want to talk about as well," Harper told the House of Commons.

Harper did not threaten to divert oil shipments to China, although his trade minister at the time, David Emerson, observed that "we are the largest supplier of energy to the U.S., and NAFTA has been the foundation for integrating the North American energy market."

In the debate, Obama said nothing about the Canadian reaction.

"I believe in free trade," he said, "but I also believe that for far too long — certainly during the course of the Bush administration, with the support of Senator McCain — that the attitude has been that any trade agreement is a good trade agreement, and NAFTA doesn’t have, did not have, enforceable labour agreements, environmental agreements.

"What I said was we should include those and make them enforceable."

Republican seen as playing catch-up

In the days before the debate, held at Hofstra University on New York's Long Island, some polls suggested that Obama, the Democratic candidate, was widening his lead over McCain, the Republican.

A CBS News/New York Times poll had Obama leading McCain by 53 per cent to 39 per cent among likely voters, the widest margin of any poll in the campaign so far. Other polls suggested that McCain was also trailing in key battleground states.

The official debate topic was domestic policy and the economy, the latter being a hot issue at a time of global financial turmoil.

But a much-discussed question beforehand was how aggressively McCain would attack Obama.

In the run-up to the debate, he promised to "whip" Obama's "you know what." But he also deflected hostile remarks about Obama from his own supporters, calling the Democrat "a decent person and a person that you do not have to be scared of as president of the United States."

Ties to ex-bomber a McCain talking point

As expected, Obama's relationship with Ayers, a leader of the violent 1960s group the Weather Underground, came up. But it was the moderator, CBS News anchor Bob Schieffer, who raised it.

"Both of you pledged to take the high road in this campaign, yet it has turned very nasty," Schieffer said.

"Senator Obama, your campaign has used words like erratic, out of touch, lie, angry, losing his bearings to describe Senator McCain.

"Senator McCain, your commercials have included words like disrespectful, dangerous, dishonourable, he lied. Your running mate said he palled around with terrorists."

Obama argued that McCain is a staunch supporter of U.S. President George W. Bush. (Gary Hershorn/Reuters)

The last point is one both McCain and his vice-presidential pick, Sarah Palin, have pounded on in recent weeks.

"I don't care about an old, washed-up terrorist," McCain said in the debate. But he went on to say that the public deserves to know the full extent of the relationship.

"You launched your political career in Mr. Ayers' living room," he said, drawing an immediate denial from Obama, who added: "Mr. Ayers is not involved in my campaign; he will never be involved in this campaign, and he will not advise me in the White House."

Obama, while acknowledging that their paths have crossed repeatedly, has called Ayers “somebody who engaged in detestable acts 40 years ago, when I was eight” — a line he recycled in the debate.

The two men live a few blocks apart in Chicago. In 1995, the former bomber — by then a professor of education at the University of Illinois — held a coffee gathering at his home for Obama as the younger man began his first campaign for public office, winning a seat in the Illinois state senate.

The human toll attributed to the Weather Underground, also known as the Weathermen, included a police officer killed and another badly hurt by a pipe bomb; two officers and a Brinks guard killed in an armoured truck robbery; and three radicals killed in a bomb-making accident.

It is unclear how many bombings Ayers took part in personally. Charges against him were dropped in 1974 because of illegal wiretaps and other prosecutorial misconduct.

The 90-minute event was broadcast live on CBC Newsworld at 9 p.m. ET. A recorded version can be viewed by clicking the link at the upper right.

With files from the Associated Press