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World markets face tense days waiting for the US Congress to try to pass a revised version of the US$700 billion Wall St bailout plan.
More banks toppled in Europe and stockmarkets around the world nosedived as what was seen as the best chance of restoring confidence to the global financial system was thrown out by the US House of Representatives on Monday.
The alternative to US Treasury Secretary Henry Paulson's costly and sketchy plan is a piecemeal approach unlikely to create the effect many believe is required.
But Democrat and Republican leaders pledged to keep working to get a plan acceptable to all sides.
Another vote is possible late in the week.
Susan Schroeder, senior lecturer in business and economics at Auckland University of Technology, said the Paulson plan was flawed, but it was the best chance of restoring confidence in the short term.
A revised version needed to be pushed through as soon as possible.
"The financial system is running short of capital, which, in turn, stymies the extension of credit and threatens to derail the US economy and the global financial system," she said.
World Markets overnight(AP):
Britain's FTSE 100, closed up 1.7 per cent at 4,902.45 points
Germany's DAX index rose by 0.41 per cent to 5,831.02 points.
The French CAC-40 was up 0.4 per cent to 4,032.10 points.
The Swiss market index closed at 6,654.89 points, up 154.76 or 2.38 per cent.
The Italian All Share Mibtel index closed at 19,512 points, down 110 or 0.56 per cent.
Ireland's ISEF Index closed 7.9 per cent up.
The Dow Jones industrial average rose 1.76 per cent
Japan's Nikkei stock 225 index fell 4.12 per cent to close at 11,259.86
In Australia, the S&P/ASX-200 index fell 4.3 per cent to 4,600.5 points, the lowest since December 2005.
Hong Kong's Hang Seng index gained 0.76 per cent to close at 18,016.21
Reserve Bank Governor Alan Bollard said last night that the Congress failure to agree on the bailout plan was a disappointment.
"It leaves parts of the financial markets in limbo until the matter is resolved.
"In the meantime, the very short-term effects on the New Zealand market are not major.
"However, there could well be medium-term effects on the economy - but we will continue to deal with them through our normal monetary policy process."
As the US House of Representative votes were being tallied, reports were emerging of the latest casualties of the 15-month-old credit crunch which many fear will choke off lending to businesses and households around the world, sparking a global economic crisis.
Governments announced rescue packages for banks in Germany and Iceland in addition to those of Belgian-Dutch bank Fortis and British mortgage lender Bradford & Bingley.
"It doesn't feel like the world's coming to an end but certainly we're going through something pretty massive," said John Rowley, head of Macquarie Financial Services Group New Zealand.
"The biggest dilemma we've all got at the moment is trying to understand something that is totally alien to what we've been through before."
Mr Paulson's plan to restore confidence in the American banking system by buying up big chunks of "toxic" housing loans faced opposition from the political right because it compromised the free market, and from the left because it was corporate welfare for greedy bankers.
Polls showed widespread public opposition to the plan and Congress members who are up for re-election shortly were bombarded with emails and other messages from their constituents angry at the prospect of their tax dollars being used to prop up Wall St.
The bill was defeated in a 228-205 vote after backers including Democrat and Republican house leaders and President George W. Bush were unable to marshall sufficient support.
With investor sentiment already affected by the failures in the US and European banking sector, the Dow Jones Industrial Average sustained its biggest point drop in history and its biggest closing decline since the day the markets reopened after the September 11, 2001, terrorist attacks.
The Dow closed 777.68 points or 7 per cent down at 10365.45.
Losses to shares on the broader Dow Jones Wilshire 5000 index amounted, on paper, to US$1.2 trillion.
Markets around the world quickly followed suit.
The NZX was the first to open after the vote, and it immediately dropped more than 4 per cent. At the close of trade, it was down 98.32 points or 3.18 per cent at 3090.22.
Australia's ASX-200 closed 207.9 points or 4.3 per cent down at 4631.3, Japan's Nikkei was down 483.75 or 4.12 per cent at 11,259.86.
Mr Rowley said yesterday's session was always going to produce "a kneejerk reaction to something which probably on balance everybody expected would be resolved".
Most New Zealand investors should already be positioned to weather the latest difficulties "simply because this has been with us so long now".
NZX chief executive Mark Weldon said the failure of the bailout plan and its consequences may be a necessary evil.
"There are those who say you can't continue to prop up the US economy forever," he said.
"You can't have consumers spending more than they earn forever - this has to come to an end.
"There will be pain and there will be contraction in the US. It's just a matter of figuring out where it should fall."
