Wall Street plunges after vote fails, gold soars

By Herbert Lash

NEW YORK (Reuters) - Major U.S. stock indexes dropped the most in two decades on Monday after U.S. lawmakers rejected a $700 billion bailout plan and major U.S. and European banks made emergency deals to survive, making investors flee to gold, government debt and the low-risk yen.

The Dow fell more than 770 points, its biggest single-day decline on record. Spot gold prices jumped more than 4 percent and crude oil prices fell almost 10 percent after the U.S. House of Representatives voted down the bailout bill.

The broad Standard & Poor's 500 Index .SPX fell 8.77 percent, its biggest one-day decline in percentage terms since Black Monday in October 1987 when it plummeted 22 percent.

World stocks, as measured by MSCI's all country world index, lost about $1.7 trillion for the day.

The failed proposal would have authorized the U.S. Treasury to spend up to $700 billion to buy illiquid assets from banks.

The bill was defeated by skeptics from both parties who questioned the need for it and whether it would work to jump-start stalled capital markets around the world.

"What should have been a day of hope turned into a day of desperation," said Marco Annunziato, chief economist at UniCredit in London. "We are facing a systemic crisis of confidence in the global financial system that is pushing us increasingly close to a complete meltdown."

President George W. Bush and Treasury Secretary Henry Paulson said the administration would work to develop a strategy to rescue the financial system.

The Dow Jones industrial average .DJI closed down 777.68 points, or 6.98 percent, at 10,365.45. The Standard & Poor's 500 Index .SPX shed 106.59 points, or 8.79 percent, to 1,106.42. The Nasdaq Composite Index .IXIC lost 199.61 points, or 9.14 percent, to 1,983.73.

The congressional vote, designed to stabilize skittish financial markets around the world, stunned investors who wondered what would come next.

"We are in a situation where the market is looking around and saying what else can the government throw at us, and it is not much else right now," said Rudy Narvas, senior analyst at 4cast Ltd in New York.

Before the vote, the euro and British pound tumbled against the dollar and crude oil prices dropped nearly 8 percent to below $99 a barrel on signs the crisis was spreading beyond the United States to Europe and cut energy demand worldwide.

U.S. and euro-zone government debt soared in one of the biggest rallies for fixed-income securities this year as fears of spreading bank failures overshadowed moves by central banks to pump hundreds of billions of dollars into frozen markets.

Aversion to risk boosted the low-yielding Japanese yen as investors flocked to safe-havens.

In Europe, the leading index of European shares fell more than 5 percent to a three-and-a-half year closing low, while many indexes elsewhere, especially in emerging markets, tumbled harder.