Shares Plummet As Us Congress Rejects $700bn Bail-out Plan

The US government's $700bn emergency bail-out of the banking industry collapsed in disarray tonight as Congress voted against the plan, sending Wall Street stocks plummeting and spreading ripples of shock through the global financial markets.

Despite a round-the-clock weekend negotiating session, members of the House of Representatives ignored a last-ditch appeal from George Bush by rejecting the rescue scheme on an initial count by 228 votes to 205.

As Congressional leaders went back to the drawing board, the Dow Jones Industrial Average plunged on fears of further banking failures.

The blue-chip average closed down 7%, a 778 points drop which exceeds its biggest ever previous one-day points fall of 684 in September 2001.

The dramatic and unexpected show of political opposition came largely from the Republican benches, where a majority of congressmen opposed the measure citing concern among the public about the cost of the bail-out. The White House said Bush was "very disappointed" by the outcome.

The Republican leader in the House, John Boehner, pledged that political leaders would continue looking for a solution which could satisfy all sides.

"We put everything we had into getting the votes to get there today," he said. "I think we need to renew our efforts to find a solution that Congress can support."

On Wall Street, there were audible groans as traders gathered around television monitors to watch the vote playing out.

"Everybody just stood their with their mouths open," said Sal Catrini, an executive director at JP Morgan in New York, who predicted that uncertainty would send stocks falling even further. "We're seeing real selling but no buyers."

The price of oil plummeted by more than $6 per barrel on concern that commercial activity would wane, the dollar shrunk on worries about the future of the US economy and the price of gold leapt by 3% as investors sought safe havens from the storm.

In London, where the market closed before the outcome of the vote became clear, the FTSE 100 index dropped by 5.3%, shedding 269 points to close at 4,818.

But in New York, major indices were down even further. The technology-dominated Nasdaq exchange was heading for its biggest drop since September 2001 with a fall of 6.3%, while the broader Standard & Poor's 500 index dropped by 6%.

Lawmakers' negative vote came in spite of a spate of reminders of the fragility of the financial industry. Following the British government's nationalization of Bradford & Bingley over the weekend, a US bank, Wachovia, was rescued from the brink of collapse by Citigroup today and the Icelandic government stepped in to rescue one of its leading banks.

The Democratic leader in the House, Barney Frank, said he would assess the economic reaction before deciding what to do next. He blamed Republicans for "killing" the bail-out. But conservatives said the Democratic speaker of the House, Nancy Pelosi, had caused ill-will by making a "partisan" speech in the closing hours of a debate on the plan.

The bail-out was conceived as a government fund to buy up toxic mortgage-related securities which have poisoned the balance sheet of leading banks, causing the collapse of Lehman Brothers and Bear Stearns and threatening other Wall Street institutions.

Over the weekend, leaders from both parties packed the plan with concessions in an attempt to win over skeptics. The Democrats inserted limits to pay packets for senior banking executives while the Republicans won the creation of a state-sponsored insurance scheme intended to guarantee against future defaults.

The Congressional vote amounts to a shattering defeat for Bush and for the treasury secretary, Henry Paulson, and will further undermine the White House's credibility in Bush's last months in office.

In an early morning address, Bush had appealed for approval from Congress: "With this strong and decisive legislation, we will help restart the flow of credit, so American families can meet their daily needs and American businesses can make purchases, ship goods, and meet their payrolls."