Bailout treated with caution | UK banks could benefit | US critics gloat | Gerard Baker | Message for Darling | Q&A - the bailout

A deal designed to rescue the banking system and save the world economy from catastrophe - but costing each American taxpayer $5,300 - see-sawed from outline agreement back to the brink of collapse after another day of political drama in Washington

Stock markets had breathed a sigh of relief when Congressional leaders heralded what would be the biggest bailout in history before a weekend deadline set by President Bush.

But within hours a series of senior Republicans had lined up to insist there was no agreement while a White House meeting between Barack Obama and John McCain, as well as key figures from Congress, broke up with all sides accepting more work was needed.

Richard Shelby, the senior Republican on the Senate Banking Committee, was first to emerge from the White House summit to announce "the agreement is obviously no agreement".

Last night Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke raced back to Capitol Hill to revive the proposal which could cost as much as $700 billion. Negotiations ceased around 10pm and are due to resume this morning.

Mr Paulson was reported to have walked into a meeting with Democrats and pleaded: "Don't blow this up." They replied that blame lay with Republicans, particularly those in the House of Representatives, who appeared to be issuing new demands after coming under intense pressure from free-market conservatives who loathe the deal.

Some senior Democratic figures suspect opposition is being choreographed so that Mr McCain could be seen to deliver an eleventh-hour solution today. Others suggest that with fewer than a hundred House Republicans prepared to vote for the measure, Democrats may be left carrying the can for a deeply unpopular and high-risk deal.

Mr Obama said the delay was “pretty frustrating", adding that both sides had appeared ready to strike a deal yesterday morning until “something happened in the intervening hours.”

Mr McCain acknowledged that many members of Congress continue to have concerns about “the biggest event of this kind in history” - but insisted he remained hopeful that agreement can be reached today.

Both presidential candidates stayed in Washington last night. Mr McCain has said that without a deal, he would not turn up at tonight's first debate with Mr Obama.

But neither campaign really wants to be seen to torpedo a plan that, it is hoped, will draw to a close the most turbulent period for the American stock market since the 1929 Wall Street crash. In the past ten days one investment bank has gone bust, the world’s biggest insurer has been nationalised and stock markets across the world gyrated wildly.

The proposal would allow banks to dump toxic assets into a federal fund controlled by the US Treasury. British banks that have significant operations in the US would be able to take part.

Under the accord announced earlier yesterday, Mr Paulson would have been given $250 billion immediately and could have an additional $100 billion if he certified it was needed, an approach designed to give Congress a stronger hand in controlling the rescue schemes spending.

The Bush administration has made a number of concessions on demands to limit pay for executives of bailed-out financial institutions and give the government an equity stake in rescued companies.

Chris Dodd, the chairman of the Senate Banking Committee Chairman suggested that the injection of presidential campaign politics had caused negotiations to be distracted for "two or three hours by political theatre” and that it had begun to resemble “a rescue plan for John McCain”.

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