Investors across the world were steeling themselves last night for a new wave of financial turmoil today after the dramatic rejection of the Bush Administration’s $700 billion (£387 billion) bailout plan for America’s banks sent shockwaves across global markets.

On Wall Street, US markets were gripped by a surge of panic and uncertainty in the wake of the House of Representatives’ unexpected move to vote down the rescue scheme.

The startling verdict from America’s lawmakers triggering a renewed and headlong flight for safe sanctuary in government bonds and gold, and drove US blue chip shares into freefall.

In the wake of the vote, the benchmark Dow Jones industrial average plummeted to a record fall of 778 points, dropping by 6.98 per cent, its biggest one-day percentage slump since the Black Monday crash of Monday October 19, 1987, to close at 10,365.5. The broader-based S&P 500 index of US blue chips closed down by a huge 8.8 per cent, in its worst losses for two decades, while the tech-laden Nasdaq plunged by 9.1 per cent.

Earlier, shares in London and across the eurozone also slumped as European authorities scrambled to prop up yet more failing banks, amid rising worries that the crisis is spreading unchecked. Britain’s benchmark FTSE 100 index fell to its lowest for more than three years, dropping by more than 5 per cent.

Gerard Lyons, chief economist at Standard Chartered, said the global economic downturn was now likely to be deeper, more prolonged and with more job losses. “The bailout plan would have given us an orderly recession; now we’re going to have a disorderly recession,” he said. “Confidence has been shot to pieces. We need a good plan B.”

The brutal losses for US shares came as investors fled equity markets, and dumped risky assets of all kinds in a further dash for the relative security of the US Treasury bond market and other safe havens.

The benchmark 10-year Treasury note leapt in price by more than £2.31, driving its yield down to 3.64 per cent, from 3.85 per cent late on Friday. The yield on two-year Treasury notes tumbled below 2 per cent, to 1.69 per cent.

Earlier, the US Federal Reserve formed a united front with other leading central banks to redouble efforts to prevent complete seizure of the world’s money markets as global financial convulsions reached a dangerous new pitch.

As the defeat in Congress for the bailout plan later threatened complete paralysis of swaths of the global financial system, the central banks mounted another multibillion-dollar operation to try to jump-start stalled capital markets, and vowed to do still more.

The Fed sharply increased currency swap arrangements with the European Central Bank, the Bank of England and other key central banks by a further $290 billion to $620 billion in an attempt to keep desperately scarce dollar funding flowing between banks across the world.

In the latest expansion of its efforts within the United States to keep America’s credit markets moving, the Fed also announced plans to increase its auctions of three-month dollar funding to US banks under its so-called term auction facility by another $150 billion, to $300 billion. It announced further plans for future auctions under the facility worth $150 billion each to be held in November. when money markets strains intensify ahead of the year-end. In total, the Fed’s latest moves increased its supply of dollar funding to markets on a continuing basis to $480 billion.

The Fed’s measures came amid fresh interventions by other leading central banks. The Bank of England auctioned £40 billion in three-month loans of sterling to UK banks as the Treasury moved to nationalise the stricken Bradford & Bingley.

The European Central Bank auctioned €120 billion (£95.8 billion) of 38-day funding to eurozone banks and pledged to keep extra cash in play until at least early next year.

The flurry of central bank action came as money markets remained close to seizure as fearful institutions hoarded funds. In a symptom of the strains, the cost of three-month loans in euros between banks climbed to a record 5.22250 per cent. The waves of fear sweeping markets were emphasised by a plunge in the pound as the Bradford & Bingley rescue stoked concerns over Britain’s economy. Sterling came close to its sharpest one-day percentage fall against the dollar since 1993, dropping by 2.5 per cent, to levels below 1.80, before clawing back ground to close at $1.8094.

Central bank chiefs at an Amsterdam meeting of the Financial Stability Forum insisted they were determined to restore confidence. Mario Draghi, Governor of the Bank of Italy, who chaired the talks, said: “It’s quite clear that the emphasis was on the determination [we] have in winning the battle to restore confidence and stability,” he said. “If people think the authorities may give in to fears, they are wrong.”

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