Dow sinks 777 points after U.S. lawmakers reject bailout

The plunge came with investors already fretting over a deepening of banking sector problems in Europe and the United States, with at least three banks saved with government aid.The Dow Jones Industrial Average sank 777.68 points (6.98) percent to close at 10,365.45 in its biggest single-day point decline ever.The slide eclipsed a 684-point drop on September 17, 2001, when the markets reopened following the September 11 terror attacks. In percentage terms, the drop was the 17th worst on record.The market bloodbath sent the Nasdaq down 199.61 points (9.14 percent) to 1,983.73, its lowest since 2005. The broad-market Standard & Poor's 500 index slid 106.59 points (8.79 percent) to 1,106.42, hitting its lowest level since 2004.Markets went into panic after the House of Representatives rejected a fragile compromise plan to spend up to 700 billion dollars to revive a financial sector weakened by a U.S. housing meltdown.Crude oil plunged 10 percent as investors priced in a much weaker economic outlook. New Yorks main contract, light sweet crude for November delivery, tumbled 10.52 dollars a barrel to close at 96.37 dollars."It is unclear what the next step will be. It took days of painstaking negotiations to put together the deal, and congressional leaders and administration officials may have to go back to the drawing board," said Augustine Faucher at Economy.com."The U.S. is looking at a severe recession if Congress fails to pass some sort of package."Most European market was already closed when the news broke, but had suffered heavy losses amid concerns about the outlook for the rescue and fears about the health of the banking sector.The panic extended to Brazil, where the Sao Paulo stock market plunged 9.36 percent. Canada's S&P/TSX slid 6.93 percent and Mexico's Bolsa tumbled 6.4 percent.Brian Bethune at Global Insight said if no new deal can be struck; the Federal Reserve may have to look for new tools to avert a deeper crisis."If the legislation is indeed moribund -- as it seemed to be on Monday afternoon -- then the baton will pass quickly to the Fed and other central banks to deal with the fallout," he said.

"A coordinated central bank rate reduction of 50 basis points, or more, by the Fed, the Bank of England, the Bank of Canada and the Reserve Bank of Australia, is certainly not off the table given the scale of the crisis."

Adolfo Laurenti, economist at Mesirow Financial, said the rescue plan had faced deep divisions because "there were those who felt it was a bailout for Wall Street."

He added: "I still believe there will be one form of action or another at the end of the day.

The plunge on Wall Street was damaging but "Im not sure this is the meltdown that many had feared," Laurenti added.

"Of course, there are only a certain amount of days like today we can withstand. If we have a Tuesday and a Wednesday that look like this it will be a sign we are at a breaking point."

Steep losses were suffered by European bourses following weekend news of a government bailout of financial giant Fortis by the Belgian, Dutch and Luxembourg governments.

In Britain, Bradford & Bingley bank was rescued with a partial takeover by Spanish bank Santander for 612 million pounds (773 million euros, 1.1 billion dollars) and by the British government's nationalization of its mortgage and loans portfolio.

In the U.S., Citigroup agreed to take over the banking operations of Wachovia in a government-backed deal that gives the government a stake in one of the nation's largest banks, highlighting the ongoing woes of the sector.

Citigroup, who agreed to absorb up to 42 billion dollars in losses from the Wachovia deal and will become the biggest U.S. bank in terms of deposits, fell 11.9 percent to 17.75 dollars. Wachovia shares became nearly worthless, plunging 81 percent to 1.84 dollars.

Other financial shares faced heavy pressure.

National City Corp., seen as another fragile regional bank, plunged 63 percent to 1.36 dollars.

Morgan Stanley slid 15.2 percent to 20.99 dollars after announcing terms of a deal unveiled last week in which Japan-based Mitsubishi UFJ Financial Group will invest nine billion dollars for a 21 percent interest in the Wall Street firm.

JPMorgan Chase fell 15 percent to 41.00 and Bank of America slid 17.6 percent to 30.25 dollars

Bonds rallied as investors fled to safety. The yield on the 10-year U.S. Treasury bond fell to 3.632 percent from 3.827 percent Friday and that on the 30-year bond slid to 4.161 percent against 4.357 percent. Bond yields and prices move in opposite directions.