The main UK and other European share indexes have dropped dramatically in early trading after a $700bn (£380bn) US financial rescue plan put forward by the Bush administration failed to gain Congressional backing.

Wall Streets Dow Jones index saw its biggest one-day point’s fall in history yesterday after the deal was surprisingly rejected.

The UK’s FTSE 100 index was down 0.9%, or 43 points, at 4,775, while France’s Cac 40 had fallen 52 points, or 1.3%, to 3,902. Germany’s Dax was down 1.7% or 100 points at 5,707, while Asian stocks have already seen big declines in Tuesday trading.

Baking shares were the biggest fallers in London, as concerns grow about how the delay in securing a rescue deal in the US will hit the financial system.

Newly rescued HBOS was down 12 percent, while its new owners Lloyds TSB dropped by 9 percent. Royal Bank of Scotland was 11 percent lower.

The shockwave has been felt across the world.

Japan’s Nikkei index ended Tuesday down 4.1 percent, and Hong Kong’s Hang Seng had lost 2.4 percent in late trading. In Russia, all trading has been suspended on the country’s two main stock markets.

The Republic of Ireland’s government announced that all bank deposits would be guaranteed for the next two years, and Franco-Belgian bank Dexia has received a state bailout, with the Belgian, French and Luxembourg governments pumping in a combined 6.4bn euros (£5bn).

The architect of the US rescue plan, Treasury Secretary Henry Paulson, said that it was vital to get a new deal agreed, adding: “This is much too important to simply let fail”.

US president George W Bush is due to make a statement on the deadlock over the bail-out plan later today, however critics say that the president has been ineffectual in the crisis so far so its difficult to see how that might change anything. Congress will not meet again until Thursday, with another vote unlikely before the weekend.

The House’s rejection of the bail-out plan came after a day of turmoil in the US and Europe, with Wachovia, the fourth-largest US bank, being bought by larger rival Citigroup.

The US rescue plan, a result of tense talks over several days between the government and lawmakers, was rejected by 228 to 205 votes in the House of Representatives.

About two-thirds of Republican lawmakers refused to back the rescue package, as well as 95 Democrats.

Mr Paulson said, after a discussion with the president, that the government’s plan to address the crisis facing the US financial sector was much too important to be allowed to fail.

He said that US regulators would use “all the tools available” to help the US economy, but warned that their powers were “insufficient”, he warned.  He believes something needs to be done “as quickly as possible”.

Analysts say that without a bail-out plan, the banks will be left to handle all their own bad mortgage debt as best the can and more of them will be in danger of going bust.

The government has announced the nationalisation of the UK’s largest buy-to-let mortgage lender, Bradford & Bingley, with Spanish Bank Santander buying its branches.

Chancellor Alistair Darling said: “The Government, on the advice of the Financial Services Authority and the Bank of England, acted immediately to maintain financial stability and protect depositors, while minimising the exposure to taxpayers.”

Customers need not worry, as the Treasury says that customers money is safe, however, people owning shares in the bank will lose out.

Santander currently owns Abbey National and Alliance & Leicester, and the Spanish banking giant will take over B&B’s UK branch network and £21bn deposit book for £612m.

Santander, only recently bought over A&L, and will now acquire B&B’s depositor base of 2.7m customers and it 197 branches across the nation.

B&B’s customers can continue to use their existing methods of banking – in branch, phone and internet – for transactions, as usual. The mortgage lenders branding will also remain in place.

As part of the sale, recently appointed chief executive Richard Pym and finance director Chris Willford are expected to remain to transfer B&B’s deteriorating mortgage portfolio into taxpayer hands.

Lloyds, with new partner HBOS, is believed to have put forward a bid for B&B’s assets, viewing the deposit book as a means to bolster its deposit base and reduce its reliance on expensive wholesale funding. Both Santander and Lloyds bids were understood to have been low, in part because it believes that more B&B depositors are likely to withdraw their funds as the bank is carved up. Since June this year customers have already withdrawn about £1bn from B&B, when the bank held about £22bn.

Even though the performance of B&B this year has been poor; the collapse in its share price and the botched rights issue that needed to be overhauled twice, departing board members will be entitled to a pay off equivalent to their annual salary. The banks chairman Rod Kent was paid £265,000 last year, with other non-executive directors collectively earning almost £320,000.

Northern Rock’s chief executive, Adam Applegarth, left with more than £1.1m made up a pay-off of £765,000 and a £346,000 pension top-up.

HSBC is set to axe over a thousand jobs worldwide. The banking giant blames the current financial turmoil for its decision, which will affect 1,100 out of its 335,000 staff members across the world.

Half of the job cuts will take place in the UK, and will mostly affect back room jobs at its global banking and markets operation.

Last month, the bank reported a 28 percent fall in half year profits to $10.2bn (£5.2bn), as it was forced to write-off $14bn from bad debts in the US and asset write-downs. Pre-tax profits also fell 35 percent to $2.1bn during the same period.

A spokesman for HSBC said the firm had been forced to reduce its workforce due to “market conditions and the economic environment.” The spokesman also said the banks “cautious outlook for 2009” has influenced its decision.

The majority of the job-losses will be at the London headquarters of HSBC’s investment banking division.

The credit crisis has put pressure on banks around the world, forcing governments to step in and boost money markets as well as bail out a number of companies.

Earlier in the year, the UK government has to buy mortgage lender Northern Rock, and recently struggling HBOS was taken over by Lloyds TSB. The situation in the UK is echoed across the Atlantic where in the US, lenders Fannie Mae and Freddie Mac have had government rescues, and Lehman Brothers recently filed for bankruptcy.

A European court adviser has rejected a challenge from Age Concern to the rights of employers to make people retire at 65. The Advocate-general, a senior legal advisor to the European Court of Justice, backed current rules – however the decision is not binding.

Age Concern is challenging UK laws established in 2006, which have allowed the forcing of workers to retire at 65.

There are currently 260 people in the UK with cases at employment tribunals which depend on the European Court’s ultimate decision.

Most of these people fell they have be discriminated against for their age, and are now struggling financially because they no longer have a steady income.

Campaigners believe that have a working age limit is discriminatory, and say that the case is likely to run for some time. The Advocate-general’s view could influence the judges who are expected to give their ruling in the case just before Christmas.

If the judges find in the campaigners’ favour, the case could then return for a final hearing in the British courts.

The employer’s organisation the CBI has argued that a normal retirement age of 65 is an essential management tool. It also added that employees can ask to work beyond that age.

The organisation believes that employers have a duty to consider these requests, and says that this system has proved to be a success.

The case is being brought by Heyday – an offshoot of Age Concern, and was prompted by a survey of 60,000 people, of which 80 percent believed the current rules were unfair.

Ailsa Olgive, Heydays’s director, said that the current rules were “costing good workers their jobs”.

“Denying people work because of their date of birth is grossly unfair, and in these tough times we expect more people will need to carry on working into ‘retirement’ in order to make ends meet,” she said.

“More than a million people are already working past state pension age and they are the fastest growing group in the workforce.”

At the Labour Party conference in Manchester, Chancellor Alistair Darling is set to promise action over weaknesses in the financial system, pledging to avoid “knee-jerk” reactions, taking measured decisions for long-term stability instead.

His speech comes as financial experts say taxes will have to rise as borrowing soars.

In an interview with the BBC, Mr Darling was asked if income tax is likely to go up, instead of a straight “yes” or “no”, he replied: “it is not the time to take money out of the economy”.

When asked to explain his answer, Mr Darling said that the time to pay back debt was when the economy is doing better.

He added that at the moment, rather than increasing taxes, basic rate tax payers were paying less tax this month.

The chancellor will fly with the Prime Minister Gordon Brown from the conference to New York in an effort to establish an international agreement for tighter regulation of the financial sector.

On Sunday, Mr Brown told the BBC he was considering a crackdown on “irresponsible” City bonuses which encouraged risk-taking and a level he believes is “excessive”.

Mr Darling’s keynote speech should see him commit to taking whatever steps necessary to tackle turmoil in the markets, but he will also warn that solutions to the problems of globalisation will or be found by one government alone.

Mr Darling will say: “Just as one government alone cannot combat global terrorism, just as one government alone cannot deal with climate change, one government alone cannot deal with the impact of globalisation.

“In the next few weeks Gordon and I will be in the US and in Europe and speaking to finance ministers around the world to put in place measures to help prevent the mistakes and misjudgements which caused the crisis.”

In the meantime, unions are expected to use the conference to demand a windfall tax on energy firms to help households below the poverty line to pay their gas and electricity bills.

The demands for a levy will be spearheaded by Unite general secretary Tony Woodley; however, due to a rule change, unions and activists will not be able to force a vote on whether to make such a tax Labour Party policy.

Chancellor Alistair Darling came under fire last night after he was accused of urging bosses of the UK’s new super-bank to protect jobs north of the border.

Critics say that with a Scottish by-election soon, the thought of 25,000 Scottish job losses would have been a hammer blow to Gordon Browns survival.

Yesterday Mr Darling admitted that he had made his concerns “very clear” to Lloyds TSB bosses about the future of HBOS’s iconic Edinburgh Headquarters – The Mound.

The company has insisted that the Edinburgh office will make it through the re-shuffle, continue to print Scottish banknotes and added that its ‘management focus’ would be on saving as many staff as possible north of the border.

City analysts were taken aback by the merger document’s specific pledge to ‘keep jobs in Scotland’ and pointed out that it doesn’t sit easily with an overall drive to find £1billion in job cuts.

They feel that appeared employees in England would face the brunt of the cutbacks.

In an interview with Radio 5 Mr Darling said, “HBOS and the new group will continue to have a very significant presence in Scotland.

“I can well understand, not least because I happen to be an Edinburgh MP, where a lot of my constituents work for HBOS, people will be concerned.

“I have spoken to the bank, not just about jobs, but the need to maintain a very significant presence in Edinburgh, in Scotland.”

Last night a spokesman for the chancellor denied that he sought any undertaking on Scottish jobs from Lloyds TSB bosses.

Lloyds TSB has confirmed its takeover of HBOS to become the UK’s largest bank, in a deal it described as a “unique opportunity”. The deal values shares in Halifax Bank of Scotland at 232p each, and could lead to cost savings of £1bn a year.

Lloyds confirmed the speculation that jobs would be lost as a result of the merger, but played down the claims that 40,000 staff would face the chop.

The government featured heavily in the talks between the companies yesterday. Chancellor Alistair Darling said that the government was in support of the deal, as financial stability “must trump” competition fears.

The chancellor added that without the deal the outlook was “very bleak indeed”, and denied that the authorities had rushed through the deal.

“We were onto their [HBOS's] problem for several weeks. It didn’t just suddenly happen,” he told the BBC.

The buyout is more of a rescue package for HBOS as the company’s shares dropped dramatically in recent days, amid concerns for it future.

Lloyds said that the new bank would continue to use HBOS’s headquarters in Scotland and would focus on keeping jobs there.

Under the terms of the deal, HBOS shareholders will receive 0.83 Lloyds shares for every HBOS share.

“This will be a unique opportunity to accelerate and extend our strategy and create the UK’s leading financial services group,” said Lloyds chairman Sir Victor Blank.

Lloyds chief Eric Daniels was keen to point out that the takeover was not forced upon HBOS.

“There shouldn’t be any impression this is a shotgun marriage or a forced marriage, this is something that’s been looked at for a good long while,” he told reporters.

Lloyds added that their takeover was part of its strategy to build “the UK’s leading finance company”, adding that it also intends to increase the number of competitive mortgages on offer for first-time buyers.

The merger now means that Lloyds holds a third of the UK mortgage market, but competition watchdogs will not block the deal as it was supported by the government.

Following the takeover, Lloyds chief executive Eric Daniels will assume responsibility of the company, however the future of HBOS chief Andy Hornby is unclear.

Lloyds said that the group would continue to use The Mound – HBOS’s corporate headquarters – in Scotland, continue to hold annual general meetings in Scotland and carry on printing Bank of Scotland notes. Newspaper reports have claimed that as many as 40,000 jobs could be lost from the banks’ combined 145,000 workforce.

“In addition the management’s focus is to keep jobs in Scotland,” it added.

According to the deal agreement “significant cost savings can be made by combining the networks and back offices of Lloyds TSB and HBOS”.

Also included in the cost cutting package is the “elimination of branch duplication” in the retail arm – HBOS currently has 1,100 branches, and Lloyds TSB 1,900.

Head office posts, human resources and finance and legal departments are also likely to face “consolidation”.

HBOS chairman Dennis Stevenson believes that, “This is the right transaction for HBOS and its shareholders,

“Against the backdrop of the very high levels of volatility our industry is experiencing, the combined group will be one of the strongest players in the UK financial services sector.

“In addition, the combined group will have excellent brands and a very powerful franchise,” he added.

The Financial Services Authority (FSA) agreed the merger was a good thing saying it would “enhance stability within financial markets and improve confidence among customers and investors in the UK financial sector”.

Lloyds TSB is talks with HBOS to create a UK retail banking giant worth £30bn, according to the BBC, which would end the uncertainty about the strength of Halifax-Bank of Scotland after a run on its shares.

BBC business editor Robert Peston believes the news of a merger could be announced within 24 hours, adding that the prime minister, Gordon Brown, was involved in the negotiations, which have the blessing of UK authorities.

As of yet, HBOS and Lloyds have declined to comment.

The advanced talks are being encouraged by both the Treasury and Financial Services Authority (FSA) as the deals will help to ease concerns about the UK banking sectors health.

This last week the effects of the credit crunch have seen the worldwide banking industry in chaos. Lehman Brothers, America’s fourth-largest investment bank, filed for bankruptcy protection, dealing a hard blow to the weak global financial system. The US Treasury stepped in to save the day with an $85bn rescue package to bail out AIG amid fears the group could face collapse.

Bank of America bought Merrill Lynch in a $50bn deal – making Merrill the third top US investment bank to fall prey to the sub-prime crisis within six months.

Mr Peston said there was a real concern that any run on HBOS shares would create enough fear among the bank’s financiers - providers of wholesale credit who give the bank its money - for there to be a withdrawal of credit for HBOS.

“Clearly the watchdog and Treasury will welcome a deal as it will put the bank on a sounder footing,” he said.

“The last thing they want is a fully fledged crisis.”

Peston said Gordon Brown has been involved because, “It was not in the government’s interest for there to be the faintest risk that it would have another Northern Rock on its hands,” he added.

This morning HBOS shares have swung from high to as low as 88p. If the buyout were to be confirmed it would create a banking giant that would be able to cope with the current crisis hitting financial markets across the globe.

Alistair Darling believes Gordon Brown is the “right person to lead this country” and wants his Labour Colleagues to “get behind” the prime minister. He added that people expect the government to tackle the “unprecedented turbulence” in the financial market.

Labour’s ruling National Executive Committee is due to discuss rebel MPs’ call for leadership nomination forms to be sent out to all Labour MPs. So far twelve MPs have requested forms, but 70 would be needed for a contest.

On Monday a middle-ranking, government minister – who chose not to be named – said he was considering resigning over Mr Browns leadership, saying: “You can’t go on saying ‘I think Gordon Brown is the man to lead us to victory’ when you don’t believe it.”

BBC political editor Nick Robinson said there was talk among Gordon Brown’s enemies that as many as “five or six” ministers were at the point of resigning.

The Chancellor said that what concerned people was issues like the collapse of US investment bank Lehman Brothers – which in turn has seen shares fall in leading Asian markets.

He said: “What I’d say is this, to my colleagues in particular, if you look at the front pages today, people of this country, as in other parts of the world, are concerned that at this time of unprecedented turbulence, we do everything we can to resolve these problems.

“That’s what we should be looking at.”

He added: “I have every confidence in Gordon Brown. I believe he is the right person to lead this country and to lead our party and I know that at the conference next week he will set out his vision for the future.”

The prime minister is holding a political cabinet meting from 0830 BST, where party issues such as the upcoming conference will be discussed, as well s his weekly cabinet meeting. He is expected to attend at least part of the NEC meeting from 1000 BST.

On Monday it was announced MP Barry Gardiner, one of the 12 requesting nomination papers, had left his position as special envoy for forestry “by mutual consent”. This followed the news that Labour vice chair Joan Ryan and junior whip Siobhain McDonagh were sacked for calling a leadership challenge.

McDonagh, on Friday, said: “If they refuse a leadership contest, people will ask ‘what has Brown got to be afraid of?’.”

The UK is “almost certainly” in the early stages of recession, the CBI employers’ organisation said on Monday, believing that growth will be “feeble at best” next year.

The CBI says the economy has begun shrinking this quarter, and will continue to do so over the rest of the year. If what they believe comes true, the country will face two consecutive quarters of contraction – meeting the common definition of a recession.

However, Richard Lambert, CBI director-general, believes the downturn is likely to be much milder than the recessions of the early 1990s and the early 1980s.

The assessment from the CBI comes days after the Organisation of Economic Co-operation and Development predicted that the UK will be the only big world economy to enter recession this year.

Mr Lambert says the Bank of England should be able to cut interest rates because Britain is “almost certainly in a recessionary phase”, which was likely to bring inflation down sharply.

The CBI today has cut its prediction for economic growth next year to just 0.3 percent, compared to its forecast of 1.3 percent, three months ago. It expects growth of just 1.1 percent – down from 1.7 percent – for the whole of 2008. However, the CBI has stressed that, for the moment at least, the outlook appears better than the last two big recessions.

The CBI forecasts a cumulative loss of output, from peak to trough, of 0.5 percent, compared with 2.5 percent in the recession of the early 1990s and 5 percent in the early 1980s.

“The R-word is a big deal for politicians, but out there in the real world a quarter point more or less of growth doesn’t make much difference, it just feels very tough,” says Mr Lambert.

“This is not a return to the 1990s when job cuts and a slump in demand were far more prolonged.”

Mr Lambert added that the CBI is hearing its first reports from members that SMEs are facing credit restrictions by banks.

The CBI is relatively optimistic about unemployment, predicting a rise from 1.7 million now to over 2 million in the second part of the year.

Mr Lambert believes that unemployment will increase only gradually because companies expect the downturn to be mild and relatively short. “The strong feeling is, provided companies think recession will be shallow and short, they will be prepared to hoard labour for that period,” he says.

The CBI’s bleak predictions make it more pessimistic than the Bank, which has forecast stagnation over the coming year followed by a gradual recovery in the second half of 2009. The CBI believes that “there is a significant risk that inflation will undershoot the Bank’s target”, especially if the Bank does not cut interest rates soon.