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.