Congress heads to weekend with no bailout

By Mark Egan and Jason Szep

NEW YORK (Reuters) - The biggest bank failure in U.S. history and nose diving banking stocks added pressure on the U.S. Congress to agree to a $700 billion financial rescue plan to breathe life back into credit markets.

After days of talks had collapsed in acrimony and roiled global markets, President George W. Bush expressed optimism that Congress and the White House would come together on the proposal.

As Republican and Democratic lawmakers clashed over the plan, and as U.S. Treasury Secretary Henry Paulson huddled in talks on Capitol Hill, global financial turmoil deepened.

Shortly after U.S. stocks closed higher in hopes of a bailout deal before markets open on Monday morning, U.S. House Speaker Nancy Pelosi promised that Congress would work through the weekend and said progress was being made.

"The markets need a message from us ... that we understand time is important," Pelosi told reporters.

Just before Wall Street trading closed, The New York Times said Wachovia Corp, the No. 6 U.S. bank, was in early talks with Citigroup, but no deal may emerge.

Stock in Wachovia, the sixth-largest U.S. bank, tumbled 36 percent on Friday before closing 27 percent lower on the possible deal. A subsequent report said several other banks were considering buying Wachovia.

Midwest regional bank National City Corp skidded 29 percent and California's Downey Financial Corp tumbled almost 48 percent amid a rising tide of home foreclosures and loan defaults that has spawned the worst financial crisis since the Great Depression.

In Europe, Belgian-Dutch financial group Fortis NV denied it had a liquidity problem after its shares tumbled more than 20 percent to a 14-year low. Later, Fortis sacked its interim chief executive.

U.S. regulators seized savings and loan Washington Mutual Inc late Thursday, the biggest ever U.S. bank failure, and sold its assets to JPMorgan Chase & Co.

Banks worldwide hoarded cash and showed a growing reluctance to lend, driving rates that institutions charge each other on loans to a record high in London.

"What you're going to see is the strong stronger, and the weak are going to die off," said William Smith, president of Smith Asset Management in New York.

Global money markets dried up, forcing increased injections of cash from central banks. And with no relief in sight, investors flocked to the safety of cash and U.S. government securities.

The view of many experts was that Congress had better reach a deal before the stock market's opening bell rings on Monday morning or there will be carnage on Wall Street.

"Wall Street is banking on a definitive agreement in place before markets open on Monday," said Fred Dickson, director of retail research at D.A. Davidson & Co in Lake Oswego, Oregon.