The US House of Representatives has voted against the $700bn rescue package for the financial sector.
The House rejected the bill by a vote of 228-205.
The Dow Jones Industrial Average suffered its worst single-day point decline ever, losing some 738 points.
Today's vote had been kept open by Democratic and Republican leaders in a bid to change the minds of those lawmakers who voted against the bill.
The Wall Street bailout bill would have authorised the US Treasury Department to spend up to $700bn to purchase broken mortgage-backed bonds from banks with the goal of jump-starting stalled capital markets.
Defeated by skeptics from both parties who questioned the need for it and whether it would work, the bailout plan was proposed by the Bush administration earlier this month.
It was not clear what the next steps in the crisis would be.
Congress modified it in just days amid warnings from the White House that urgent action was needed to prevent economic disaster.
This evening, both parties blamed each other for the failure of the bill.
Republican House members voted against the rescue package by a more than two-to-one margin. A majority of Democrats voted in favour.
Democratic speaker Nancy Pelosi declared that the House of Representatives' rejection of the Wall Street bailout plan 'cannot stand' and that Congress would press ahead on a rescue plan.
'We must move forward,' Ms Pelosi said.
Ms Pelosi said legislators would would continue to work to stabilise the markets.
US President George Bush said he was disappointed that the House voted down the plan but said he would continue to confront the problem head-on.
Mr Bush said he would meet with his economic advisers and work with congressional leaders to plot a way forward.
Meanwhile, US presidential candidates Barack Obama and John McCain had both offered qualified support for the bailout proposal, which now dominates the election with just over a month before the vote.
Mr Obama, a Democrat, said he believed lawmakers would regroup to pass a financial rescue plan. 'I'm confident we're going to get there,' Mr Obama said as he campaigned in Colorado. 'It's going to be a little rocky.'
Mr McCain, a Republican who suspended his campaign last week in a failed attempt to broker a bailout deal, called on lawmakers to go back to work. 'Now is the time for all members of Congress to go back to the drawing board,' he said.