Optimism turned to dismay yesterday as the US House of Representatives voted 228-205 to defeat legislation designed to rescue the nation's troubled banking system.  Senior politicians and financial officials were not able to convince the voting public that bailing out Wall Street firms would not be a move to bolster the positions of fat cat bankers but was a necessary move to shore up the world's economy.

The potential damage to the savings and pensions of ordinary American voters was overlooked by legislators fearful of an electorate they will soon be facing at the polls.

At just after 8 am British Summer Time, the FTSE 100 index of bluechip UK stocks was down about 1.3 per cent.

The Dow Jones Industrial Average fell 777.68 points, its biggest one-day drop in history, ending down 7 per cent at 10365.45 on the day. Big falls were seen in Asian markets in early trading. European exchanges are expected to open sharply down as traders digest the impact to the world's banking, wider financial and general economic systems.

But party leaders on both sides of the political divide are thought to be considering revising the initiative.

"We've got to find a true middle ground," Republican House Minority Leader John Boehner was quoted by the Wall Street Times as saying. "We need everybody to calm down and relax and get back to work”.

House Speaker, Democrat Nancy Pelosi told a press conference that the "lines of communication" remain open between policymakers and that Congress needs to take another "bite at the apple" on the market rescue plan legislation.

Under the failed bill, money would have been released in instalments, with $250 billion being made available to Treasury immediately, followed shortly by another $100 billion. The final tranche would have been released after the President submitted a plan detailing use of the funds.

The bill included compromise measures on bank executive pay and help for US mortgage payers.