The result triggered a historic sell-off in equity markets, with the Dow Jones falling more than 77 points, or 6.96%, and the S&P 500 free-falling 106 points, or 8.81% and the Nasdaq sold off nearly 200 points, or 9.14%. In Canada, the TSX fell 840 points, or 6.93%.

CNBC quoted Congressional staffers as saying both sides are "shocked" and that a second vote on the bill would not happen until Thursday at the earliest. "We need time to figure it out," a staffer was quoted as saying.

"If the legislation is indeed moribund - as it seemed to be on Monday afternoon - then the baton will pass quickly to the Fed and other central banks to deal with the fallout - which would be further tightening of credit conditions and upward pressure on borrowing spreads," noted economists from Capital Economics. "A coordinated central bank rate reduction of 50 basis points, or more - by the Fed, the Bank of England, the Bank of Canada and the Reserve Bank of Australia - is certainly not off the table given the scale of the crisis. At a minimum we would be looking for the Federal Reserve to cut interest rates sooner rather than later."

Elsa Dargent from Natixis said the odds of reaching a new compromise are weak. "The Fed's leeway is limited: after the new measures announced this morning to provide liquidity to banks, the Fed has already injected a lot of liquidity into the market," she said. "Furthermore, the TARP would have allowed the Fed to pay interest on reserves of depository institutions as early as October 1, 2008 (vs. 2011 previously), helping to manage its balance sheet. Hence, given also the worsening of the economy (potential negative growth in Q3) a rate cut by 50 or 75 bp is more and more likely in the very short term."

Although many U.S. officials agreed on the necessity of the plan, which was seen by many as a bailout of Wall Street, Republicans and Democrats sought to put additional provisions in the bill geared at protecting the taxpayer and limiting CEO compensation for firms participating in the program.

Earlier last week, House and Senate Democrats had announced that a deal had been nearly concluded, but the claim was refuted as Republican lawmakers demanded additional provisions.

In the aftermath of the announcement, House Financial Services Committee Chairman Barney Frank attributed the failure of the bill on Republican lawmakers, and that he would have to gauge the economic impact of the rejection before deciding on how to proceed.

House Republican Eric Cantor shot back with accusations that House Speaker Nancy Pelosi's partisan speech prior to the vote was responsible for the failure.

House Republican Roy Blunt, who negotiated on behalf of the Republican party, said he would meet with Republican and Democratic leaders to work out a solution.

In a press conference following the announcement, House Speaker Nancy Pelosi said the democratic caucus had more than lived up to its end of the bargain. Nevertheless, the crisis is not over, said Pelosi, who pledged to continue working with GOP leaders on another solution.

Congressional leaders from various sources said the bill would not return to a vote on Monday.

A White House spokesperson said President George W. Bush is deeply concerned about the bill's failure to pass and that he is gathering his economics team to discuss the situation.

A follow-up statement from Treasury Secretary Henry Paulson also expressed his disappointment at the failure of the bill to pass, and that he would discuss with Fed Chairman Ben Bernanke, President Bush and congressional leaders to find a way forward.

The treasury secretary also pledged that Treasury would use all the tools in its arsenal to protect the financial markets.

It has been suggested that members from both parties attempted to use the bill as fodder for the presidential campaign, with both candidates Barack Obama and John McCain returning to Washington, D.C. to participate in a meeting with the president.

The news comes on the heels of a string of bad news for U.S. financial markets, with the Federal Deposit Insurance Corporation seizing Washington Mutual and selling most of its assets to JPMorgan Chase on Friday, followed by the acquisition of Wachovia and subsequent sale to Citigroup on Monday.

In recent weeks, the Fed agreed to an $85 billion loan to American International Group, but allowed Lehman Brothers to file for bankruptcy and subsequently be sold to Barclays PLC.

The impact of the turmoil has also reached as far as Europe with Fortis Bank in the Benelux, Hypo Real Estate Bank in Germany and Bradford & Bingley in the UK all receiving government funds on Monday.

U.S. equity markets wavered as the vote teetered between positive and negative but with less than a minute to go in voting, when it appeared the nays would take the vote, the S&P 500 fell nearly 2%. As the final votes were being counted, the S&P 500 was down 77 points to 1135. It was at 1170 beforehand.

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