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The financial system lurched closer to a catastrophic breakdown last night after the US Congress dramatically rejected a bailout plan designed to restore confidence to paralysed banks.

Wall Street suffered one of its worst days in history. In 24 hours five banks across the West, including Britain’s Bradford & Bingley, had to be rescued to avoid insolvency.

With plans for the biggest rescue of Wall Street since the Great Depression in tatters, the Dow Jones industrial average of shares dived almost 800 points, losing 7 per cent of its value. It was the worst one-day points fall and the worst percentage fall since Black Monday in 1987.

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Not for the first time, the US Congress has taken a fateful step towards driving the world over the cliff

Gerard Baker

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The surprise rejection of the bailout triggered fears of a new wave of banking collapses. Other economies had looked to America to lead the way out of the crisis.

Share prices in Sydney fell 5.4 per cent minutes after the stock market opened this morning. Japanese stocks fell 5 per cent within 15 minutes of the opening bell, bringing the Nikkei to its lowest point this year as traders struggled to process a deluge of overnight sell orders and fears grew of a possible market suspension.

Hours before the Congress vote, central banks had injected billions of extra dollars into the markets, taking available funds to $480 billion.

Wall Street derived little comfort from rebel Republicans who said that they were keen to devise another plan.

Henry Paulson, the US Treasury Secretary, said: “This is much too important to simply let fail.” Nancy Pelosi, the Speaker of the House of Representatives, said that the result would not be allowed to stand. There will not be another vote until Thursday at the earliest.

Steny Hoyer, the House Majority Leader, had warned of the consequences of failing to pass the bailout bill:

“A meltdown would begin on a few square miles of Manhattan, but before it was over no city or town in America would be untouched.”

American taxpayers, who will elect a new president in five weeks’ time, have hated the bailout from the beginning. Already struggling with rising unemployment, collapsing property prices and the rising cost of living, many resented having to bail out Wall Street bankers. The plan would have cost each taxpayer more than $5,000.

The rescue scheme was designed by Mr Paulson. The $700 billion bailout fund would have been used to buy toxic assets on the books of the world’s biggest banks. He hoped that once the banks dumped those assets they would begin lending to one another again and America’s banking system would return to normal. His request triggered almost a fortnight of round-the-clock meetings as he sought support to pass the legislation required.

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