The Republican administration's $700-billion bail out plan, being steered by treasury secretary Henry Paulson, to rescue the financial institutions and restore a semblance of confidence in the global financial markets suffered a shock defeat as US lawmakers in the House of Representatives voted it down 228 to 205.

The refusal to approve the biggest proposed government intervention in the US economy since the Great Depression of 1929 was a clear snub to President George Bush's authority as 133 members of his own party, voted against it.

The US bail out was keenly watched by governments, markets and businesses around the world as many countries feared that any failure by the US to deal with the crisis on Wall Street could have disastrous repercussions for the entire global economy.

Government officials, treasury chiefs and leaders from both sides of the political divide thought they had an agreement on Sunday regarding the $700 billion rescue plan that would prop up the nation's ailing financial system and would get the necessary support in the House of Representatives. (See: US lawmakers in preliminary agreement on Bush's $700 billion bailout package)

President Bush had approved the US bailout bill after days of forceful negotiations. The bill was the brainchild of former Wall Street insider and Goldman Sachs chief and now the US treasury secretary, Henry Paulson, who requested the US Congress to give him a blank cheque for $700 billion and the authority to obtain bad debts from financial institutions so banks could start again lending to credit markets which are now nearly frozen.

The gist of the problem are the loans given in real estate that led to record foreclosures when the housing bubble burst and home prices plunged.

Since the past two days Paulson had pleaded with lawmakers to pass the bill as it could unfreeze the credit markets and short-term lending among banks and institutions.

Republican, Mike Rogers, of Michigan said in the Congress, "Despite days of negotiating, this is still the same bailout bill, written by a Wall Street guy with a Wall Street solution to a problem created on Wall Street.''

In the fiery debate on the bill in Congress, many congressmen attacked the bill saying it was a perversion of free-market economics and a departure from Reagan-style liberalism.

House Speaker Nancy Pelosi, in her speech attacked the Bush administration and said the current crisis was due to the bad fiscal and economic mismanagement of the Bush years.

She said the economic policies pursued by Bush as a "right-wing ideology of anything goes, no supervision, no discipline, no regulation" of financial markets.

Many believe that it was her partisan speech that swayed a number of congressmen in voting against the bill - more than two-thirds of Republicans and 40 per cent of Democrats opposed the bill.

Only 65 House Republicans voted for the bill, with 133 against, while among Democrats, 140 backed the bill and 95 opposed. Congressional leaders had earlier said they would need at least 80 Republican supporters and at one stage had even been hopeful of 100.

A commentator summed it saying members were reluctant to support the measure a month before congressional elections because voters would view it as bailing out the rich of Wall Street at the cost of taxpayers.

Treasury secretary Henry Paulson, said "We need to put something back together that works." Later he and Federal Reserve Chairman Ben Bernanke went in for an emergency meeting at the White House. Democratic leaders said the House would reconvene on Thursday to see whether a reworked version of the bill could possibly be passed.

As emergency rescue for the global financial system collapsed, the Dow Jones Industrial Average plunged by 777 points or 6.7 pre cent to 10,365, its biggest percentage fall for seven years and its worst drop ever in terms of points. This fall has virtually knocked out approximately $1.2 trillion in investor wealth.

India will also face the brunt of this rejection as foreign funds will unload a good amount of their holdings as heavy selling on Monday saw investors losing Rs 1.65 lakh crore and market capitalisation hit a 17-month low on the BSE dropping to 40.5 lakh crore.

Fourteen commercial banks in the US have gone bust so far this year as yet another troubled bank, Wachovia, was rescued through a takeover by Citigroup yesterday (See: Citi to acquire Wachovia assets in a US government-backed rescue)

A similar story has been unfolding in Europe where governments have rescued four lenders in two days.

The governments of Belgium, the Netherlands and Luxembourg got together to save Belgian-Dutch group Fortis NV with an emergency injection (Benelux governments inject €11.2 billion to save Fortis) of more than $16 billion.

Yesterday the Belgian government also said that it was bailing out Dexia, another high-street bank, after its shares nose-dived in early trading.

Denmark's Roskilde Bank facing liquidity crunch, also said yesterday that it had been sold to Nordic bank Nordea and two regional Danish lenders, Arbejdernes Landsbank and Spar Nord Bank.

German lender Hypo Real Estate Holding AG also secured a credit line from the German government and banks of up to 35 billion euros.

British mortgage lender Bradford & Bingley Plc was brought under the government's wing after the major bank HBOS was bought out by rival Lloyds TSB earlier this month.

Bank rescue plans have also emerged in Iceland and Russia.