U.S. lower house rejects bailout in a shock vote as fear grips markets

The Dow Jones industrial average posted its biggest point loss ever while the tech-heavy Nasdaq plummeted 9 percent -- its biggest daily loss since the dotcom bubble burst in 2000. Latin American stocks tumbled 13 percent, their biggest decline in more than a decade.

Even before the vote, Asian and European markets had plummeted on fears the crisis was spreading, while U.S. regional lender Wachovia became the latest big bank to succumb to the crisis.

And global money markets were frozen even as central banks poured hundreds of billions of dollars into the financial system to persuade financial firms to stop hoarding cash. "There's a monster amount of fear out there. This is global contagion. It's no longer just the United States," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

The House of Representatives voted 228-to-205 against a compromise bailout plan that would have allowed the Treasury Department to buy up toxic assets from struggling banks. House Republicans, in particular, balked at spending so much taxpayer money just before the Nov. 4 U.S. elections.

"I can't believe they weren't able to come together and come up with a solution. Complete disaster was predicted if it didn't pass," said Stephen Berte, senior equity trader at Standard Life in Boston. "I can't see what the upside is right now."

Investors rushed to assets considered a safe haven. Government bond prices and gold jumped, and oil fell below $99 per barrel on the view that world demand will contract as the financial crisis puts the brakes on economic activity.

U.S. BAILOUT PROSPECTS UNCERTAIN

In Washington, the failure of the bailout bill -- after more than a week of intensive closed-door negotiation intended to hammer out a compromise plan -- brought new uncertainty about the response of the U.S. government to the worst financial crisis since the Great Depression.

U.S. President George W. Bush was set to huddle with economic advisers to consider the administration's next move after the White House failed to win support for the bailout plan from Bush's fellow Republicans.

"There's no question the economy is facing a difficult crisis that needs to be addressed," White House spokesman Tony Fratto told reporters.

The bailout plan was announced by the Bush administration a little over a week ago. Republican House members voted against it by a more than 2-to-1 margin. A majority of Democrats voted in favor.

Both parties blamed each other for the failure of the closely watched bill after hours of closed-door negotiations intended to add provisions to protect taxpayers and head off criticism that Washington was riding to the rescue of bankers many Americans blame for triggering the housing crisis.

"What happened today cannot stand. We must move forward," House Speaker Nancy Pelosi told reporters. "We are here to protect the taxpayer as we work to stabilize the markets"

U.S. presidential candidates Republican John McCain and Democrat Barack Obama had offered qualified support for the bailout proposal which now dominates the election with just over a month before the vote.

Obama said he believed lawmakers would regroup to pass a financial rescue plan. "I'm confident we're going to get there," Obama said as he campaigned in Colorado. "It's going to be a little rocky."

The Senate returns on Wednesday and the House on Thursday.

The high-stakes political showdown on the bailout proposal came after Wachovia Corp agreed to sell most of its assets to Citigroup Inc in a deal brokered by regulators.

GLOBAL CONTAGION

Investors said there were ample signs that a financial crisis that started with risky lending to the overheated U.S. property market had gone rapidly global.

"The crisis is going to affect everybody. It's a very difficult situation and it's going to affect economies everywhere," Mexican billionaire Carlos Slim said.

Earlier, the governments of Belgium, the Netherlands and Luxembourg moved to partly nationalize Belgian-Dutch group Fortis NV, and German lender Hypo Real Estate Holding AG secured a credit line from the German government.

British mortgage lender Bradford & Bingley Plc was brought under the government's wing, shares of French bank Dexia tumbled on a report that it might need emergency capital, and bank rescue deals also emerged in Iceland, Russia and Denmark.

"The contagion is spreading to mainland Europe and everyone's asking, 'Who's next?'" said Mark Sartori, head of European sales trading at Fox-Pitt, Kelton in London.

Earlier, European shares had dropped to a three-and-a-half year closing low, with bank shares weighing heavily.

"Investors are fearful, frenetic, especially when it comes to banking shares. They want to get out now and see the after effects from afar," said Frank Geilfuss, head analyst at Bankhaus Loebbecke.

The world's central banks, led by the U.S. Federal Reserve, announced a $330 billion expansion of currency swap arrangements, which allows them to increase the amount of money they can provide in their home markets, effectively throwing more money at the crisis.

The Wachovia deal is the latest in a series of events that has transformed the American financial landscape and wiped out hundreds of billions of dollars of shareholder wealth.

The changes include the government takeover of mortgage finance companies Fannie Mae and Freddie Mac, the bankruptcy of Lehman Brothers Holdings Inc, the failure of giant savings and loan Washington Mutual, and Bank of America Corp's purchase of Merrill Lynch & Co Inc.