The $840 billion ($US700 billion) bailout package has failed to pass the US House of Representatives, a move that is now likely to lead to chaos in world markets.
The house voted 205 for, to 228 against the huge bailout, despite pleas from both parties' leadership and from the President George Bush.
The US Treasury now has very limited capacity to bailout firms in the future, and economists are predicting that credit markets will seize up, preventing businesses and people from getting loans for ordinary day to day business activities, for college fees, for cars, and for appliances as well as for housing.
Consumer and business interest rates are likely to rise sharply.
House leaders from both parties warned members that without the bill, America was standing on a financial precipice, which could send the US economy into a deep recession.
The Dow immediately fell nearly 600 points or 4.7pc.
The defeat of the bill came despite impassioned pleas by the leadership of both Republican and Democrat parties to vote for it.
But 132 Republicans and 94 Democrats voted against it.
Most had expected that more Republicans would support it as it was an administration bill.
The House leaders were scrambling to find a procedural way to bring the bill back before Congress before the members go home later today to begin campaigning for re-election.
Commodities were also down sharply, except for gold, amid fears of a recession.
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