The $700bn bet that failed | The World is heading for a recession | Leader: a dangerous moment | Feds join global effort | The bailout will happen | Depositors flee Glitnir | Sarkozy summons French bankers | Citigroup buy Wachovia | Mitsubishi shore up Morgan Stanley | Third sale of assets for Lehman | Asia markets drop | Obama's warning to Congress | The 10 biggest stock market crashes ever

US shares surged 485 points following yesterday’s record 8 per cent fall on hopes that US lawmakers can resurrect a plan to rescue America’s faltering financial system.

The Dow Jones industrial average rose to close at 10,850.66 points on speculation that Republicans and Democrats will reach a compromise over the $700 billion (£388 billion) bailout that was dramatically voted down by US Congress on Monday night.

The earliest that a new vote can be held is Thursday after a holiday for Jewish New Year.

Expert View

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

Gerard Baker

• More

• Post a comment

Related Links

• Obama tells Congress: we need a deal

• Nancy Pelosi blamed for bailout defeat

• The bailout will still go ahead in some form

Multimedia

• Will this split the Republican Party?

• Reaction to the failure of the rescue plan

President George W. Bush today urged Congress to act and warned that, “if our nation continues on this course, the economic damage will be painful and lasting.”

Markets were relatively buoyant today compared with the widespread panic yesterday when London ended the day nearly 270 points lower and New York recorded its worst one-day points fall since Black Monday in 1987.

In London, the FTSE 100 index of leading blue chip shares closed up 83.68 points at 4,902.45.

In France, stocks were also trading higher as President Sarkozy met the heads of France’s main banks and insurance companies to discuss the global crisis and possible corrective measures. In Germany, shares were down 0.8 per cent.

While hopes remain that President George W. Bush and Henry Paulson, the US Treasury Secretary, can persuade rebellious Republicans to sign up to a deal, the American housing market continues to suffer.

New data revealed today that US house prices fell by 16.3 per cent in July compared with last year and ahead of a 15.9 per cent decline in June, according to the S&P/Case-Shiller index.

At the same time, cautious banks are continuing to hoard cash and have forced up the cost of lending dollars to each other to a record 6.88 per cent.

Yesterday, the US Federal Reserve acted to contain the cost that banks had to pay to borrow dollars from each other by doubling the size of its currency swap arrangements with global lenders, including the Bank of England, to $620 billion.

Today, Belgium’s Dexia became the latest credit crunch casualty when it emerged that authorities in Belgium, France and Luxembourg agreed to inject €6.4 billion into the ailing lender.

Other economies had looked to America to lead the way out of the crisis.

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.

Mr Paulson 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 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.

Times Recommends

• Lessons in revolution, via YouTube
• A deadly game of wits on the roads of blood
• Florida braces for Kennedy charm attack