A $700bn (£380bn) bail-out plan aimed at preventing US banks from running out of cash has been rejected by the House of Representatives.
Had they voted yes, it would have been the start of the biggest government intervention in the economy since the Great Depression of the 1930s.
Now, however, policymakers are looking at their next move.
What are the likely results of the bail-out failure?
The immediate repercussions have been seen on the stock markets.
The Dow Jones lost 770 points – its largest one-day fall in its 38-year history. The Nasdaq index meanwhile fell 9.1% – with markets in Asia and Europe expected to see heavy losses when they open later.
There were large slumps too in the price of oil and the value of the dollar – all of which is likely to cause an expensive headache for some investors.
The evaporation of the rescue plan also leaves little clarity over how the financial sector will recover.
Credit markets are likely to remain almost frozen as banks remain reluctant to lend to other banks.
This means that it will be harder for individuals, small businesses and large firms to get the loans they need – and more costly if they do manage to get access to finance.
Was the failure of the deal expected?
Critics in both political parties had loudly called for the deal to be blocked.
Last week US politicians announced that they had struck a deal, only to see later negotiations end in a shouting match.
However failure had not been seen as likely – not least because Republican and Democrat leaders, and the US government, had agreed a very detailed deal in writing.
But with much of the electorate seeing the rescue package as an unfair bail-out for greedy bankers, many politicians felt unable to support the proposal.
So is the bail-out now dead in the water?
Treasury Secretary Henry Paulson is to consult with President George W Bush, Federal Reserve Chairman Ben Bernanke and congressional leaders on what steps to take next.
Given the strong backing for a deal – including from both presidential candidates Barack Obama and John McCain, it is likely that some form of the deal will be approved.
With financial markets taking the news badly, a reworked version of the bill is likely to go before politicians.
However this will not be until at least Thursday 1 October.
Why do rich banks need a bail-out?
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READ THE BAIL-OUT BILL
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The world’s financial markets are in deep trouble, because too many banks have invested heavily in the huge US mortgage market. Since the US housing bubble burst, banks do not know how many of these loans will be paid back.
What started as a little local difficulty has now engulfed banks around the world.
Banks simply no longer know how much the investments on their books are worth. That makes these investments difficult to sell, and results in some supposedly sound banks running out of cash.
On top of that, banks do not trust each other. They do not know which other banks could get into trouble and are reluctant to lend to each other.
This has brought the global financial system to a standstill, sent interest rates soaring and hit both consumers and businesses.
Already, the credit crunch has resulted in the collapse of several large financial institutions – both in the United States and across Europe.
How was the rescue deal supposed to work?
US Treasury Secretary Hank Paulson would have used the money to buy up many of the dubious mortgage investments.
In return, US taxpayers would have got a non-voting stake in the banks that they rescue. So if the banks recover, taxpayers might even make a profit.
However, if taxpayers make a loss, then the rest of the financial services industry will be forced to carry some of the cost of the bail-out.
The bosses of banks that were to be bailed out would have seen limits placed on the size of their pay deals, and so-called golden parachutes – huge payments to bankers leaving a bank – have been ruled out.
On top of that, financial institutions would have had to take out an “insurance policy” against future losses on mortgage-backed securities.
And in another big departure from the original plan, there would be four agencies to monitor how the money is doled out.
How would the bail-out have affected me?
If you live in the United States, another $2,300 would have been added to your share of the national debt.
The bail-outs were expected to add up to a whopping $1.8 trillion. That’s $15,000 per US household.
Without a bail-out, the economic crisis is likely to deepen.
In a worst-case scenario there could be a domino effect of banks failing around the world.
Not only would that overwhelm any systems protecting savers and investors, it could have triggered a global economic crisis, with millions of companies going out of business and tens of millions of jobs lost.
If some sort of solution can be reached, the worst of the crisis could be avoided, although it is unlikely to bring everything back to normal.
How was the US government planning to finance the purchase?
The US government had intended to borrow the money from world financial markets. The proposed legislation gave the Treasury the authority to issue an additional $700bn worth of Treasury securities.
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Treasury Secretary Henry Paulson (right) pledged yesterday to renew negotiations with lawmakers. He said he has ”significant tools in our tool kit” to fix the economy, but they are ”insufficient” to solve the current crisis without a bailout deal. (Joshua Roberts/Bloomberg)
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