U.S. bailout rejected; fear seizes markets

By Kevin Drawbaugh and Eddie Evans

WASHINGTON/NEW YORK (Reuters) - U.S. lawmakers rejected a $700 billion bailout plan for the financial industry in a shock vote that sent global markets sliding as European authorities scrambled to prop up a slew of banks.

The Dow Jones industrial average posted its largest point decline ever while the benchmark S&P 500 had its worst day since the 1987 crisis with an 8.8 percent drop. 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 November 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."

U.S. President George W. Bush huddled with economic advisers, including Federal Reserve Chairman Ben Bernanke, to consider the administration's next move.

"We need a plan that works," said U.S. Treasury Secretary Henry Paulson, the Bush administration's point man on the bailout since the first plan was announced over a week ago. "We need it as soon as possible, and we're just committed to working with congressional leaders to get it done."

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.

"What should have been a day of hope turned into a day of desperation," said Marco Annunziato, chief economist for 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."

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

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.

Republican House members voted against the rescue package by a more than 2-to-1 margin. A majority of Democrats voted in favor.