WALL Street plummeted by nearly 780 points in its largest one-day drop last night, as proposed American legislation to bail out troubled banks and kick-start the global economy was rejected by the US House of Representatives.
The price of oil slumped and global financial meltdown loomed after the bill pushed by the Bush administration was voted down.
The vote was held open until the last minute, as desperate efforts continued to persuade members to change their minds.
However, that failed and legislators were forced to accept the bill in its current form was dead.
George Bush, the US president, said he was "disappointed" by the rejection of the bail-out.
He added: "We put forth a plan that was big because we've got a big problem. Our strategy is to continue to address this economic situation head-on, and we'll be working to develop a strategy that will enable us to continue to move forward."
And Henry Paulson, the US Treasury Secretary, said the bill was "too important to simply let fail".
He added: "Markets around the world are under stress and that reduces the availability of credit which businesses across America depend on.
I will continue to work with congressional leaders to find a way forward to pass a comprehensive plan to stabilise our financial system and protect the American people by limiting the prospects of further deterioration in our economy."
On Wall Street yesterday, share prices plunged dramatically as investors followed developments in Congress.
The House rejected – by 228 votes to 205 – the bill that would have authorised the US Treasury department to spend up to $700 billion (£380 billion) to buy "broken" mortgage-backed bonds from banks.
The proposed legislation had been seen as the potential saviour of dwindling share prices around the world, as it would have jump-started stalled capital markets. Such was its importance that it had seen Mr Paulson down on one knee in Congress, begging Nancy Pelosi, the Speaker of the House, to help pass it. Republicans last night blamed a partisan speech by Ms Pelosi, a Democrat, for the bill's failure.
She had said: "This isn't about a bail-out of Wall Street; it's a buy-in, so that we can turn our economy around."
Her words were perceived as a criticism of the Republicans' stewardship of the economy under Mr Bush.
John Boehner, the Republican minority leader in the House, said Ms Pelosi had "poisoned" the debate with her contribution.
He added: "Regardless of what happened today, we've no choice in my view but to work together to try to find a solution to make sure we save our economy and we save our constituencies."
However, Congressman Jim Clyburn, the Democratic whip, accused Republicans of putting "political ideology ahead of the interests of our great country". He said: "Americans are angry, and so are my colleagues. They don't want to have to vote for a bill like this.
But I have concerns about what this means for the American people, what it means for our economy and what it means for people's jobs."
Democrat Barney Frank, the chairman of the house financial services committee, also said he was shocked that the Republicans had put themselves before their country because of "hurt feelings" over the Pelosi speech.
After the vote, Barack Obama, the Democrats' presidential candidate, urged both sides in Congress to "step up to the plate, get (a deal] done".
He added: "I'm confident we're going to get there. It's going to be a little rocky."
Before yesterday's dramatic rejection, Mr Bush had said the deal, agreed by Democratic and Republican negotiators on Capitol Hill over the weekend, was "urgently needed to address a crisis in our financial system that threatens the entire US economy". Both his potential successors, Mr Obama and John McCain, had cautiously backed the proposal after it dominated the White House race last week.
Stocks started plummeting on Wall Street even before the result of the vote was announced. At one point, the Dow Jones was down as much as 705 points, as traders prepared for the worst.
But not even that staggering collapse was enough to marshal support from the majority of the House, as members shouted "Order!" in a plea to end the vote and deal the financial rescue a death blow.
News of the plummeting Dow Jones average was shouted across the floor as legislators crowded into the House during a tense roll call, which dragged on for 40 minutes.
Behind the scenes, leaders on both sides scrambled to corral enough of their rank-and-file members to support the deeply unpopular measure.
The vote had been preceded by unusually aggressive White House lobbying, and Mr Bush's spokesman Tony Fratto said the president had used a "call list" of people he wanted to persuade to vote yes, up to a short time before the ballot. As the vote was shown on TV, stocks plunged instantly and investors fled to the safety of the credit markets.
Chris Johnson, the president of Johnson Research Group, said: "Clearly, something needs to be done, and the market dropping 400 points in ten minutes is telling you that. This isn't a market for the timid."
The markets remained volatile, with the Dow regaining ground to trade at a loss of about 360, then falling back again, and ending at 777.68 points, or 6.98 per cent down.
Last night, Gordon Brown pledged to do "whatever is necessary" to protect Britain's financial system.
The Prime Minister said the failure of the plan was "very disappointing", but insisted the UK government was taking "decisive action" to tackle problems.
David Cameron – in Birmingham for the Tory conference – said the main parties in Britain should "learn lessons" from the collapse of the US deal.
Vince Cable, the Lib Dems' Treasury spokesman, said: "Markets have invested heavily in this bail-out. It would be amazing if there wasn't a very sharp fall (today]."
IN QUOTES
"Mr Bush is very disappointed."
Deputy press secretary Tony Fratto
"I am very disappointed."
Hank Paulson, US Treasury Secretary
"Very disappointing."
PM Gordon Brown
"Democrats, Republicans, step up to the plate, get it done."
Barack Obama, presidential candidate
"If we fail to do the right thing, heaven help us."
Paul Ryan, Republican representative
"Things could get nasty."
Justin Urquhart Stewart, of Seven Investment Management
"Those who have voted No have engaged their backsides rather than their brains."
Analyst David Buik, of Cantor Index
"You were being asked to choose between financial meltdown and the road to socialism, in 24 hours."
Jeb Hensarling, Republican.
"We delivered our side of the bargain."
Nancy Pelosi, Speaker.
"This is a flaming pile of s***."
Democratic aide.
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