The US House of Representatives has rejected a $700 billion bail-out package for the financial sector. The vote was 228 to 205.
It sent US stock markets plummeting, with the Dow Jones down more than 5% just after news of the vote emerged.
The White House said it was 'very disappointed' with the vote, adding that the US faces a difficult crisis that needs to be addressed. President George Bush is said to be planning to meet his economic team to determine the next steps.
Earlier, President Bush said the plan addressed the root cause of the financial crisis and would help it from spreading throughout the economy. He had urged lawmakers to pass the legislation quickly.
The rescue package was a compromise forged in high-stakes negotiations between rival party leaders in Congress and White House officials over the weekend.
The plan would mark the largest government economic intervention since the Great Depression of the 1930s, and is aimed at shoring up a troubled economy, suffering from a burst of the US housing bubble that has ravaged the global banking system and dried up credit.
The proposal granted the Treasury secretary authority to buy up toxic mortgage-related assets in troubled banks in hopes of easing the flow of credit and reviving the moribund housing market.
Democratic lawmakers portrayed the revised plan, which ran to over 100 pages, as much improved from the three-page version sent days earlier by the White House, saying it included stricter oversight and caps on executive pay packages.
'The party is over,' said House Speaker Nancy Pelosi. 'The era of golden parachutes for high-flying Wall Street operators is over. No longer will the US taxpayer bail out the recklessness of Wall Street.'
The proposed rescue, formally titled the Emergency Economic Stabilisation Act of 2008, calls for the immediate release of $250 billion to enable the government to buy up troubled assets.
Under the bill, the president is authorised to approve a further $100 billion, but the plan gives Congress a veto power over purchases above that limit and sets a ceiling for all purchases of $700 billion.
The negotiations were reportedly marked by bitter disagreement over how to pay for possible losses suffered by taxpayers after debt has been bought and sold. Democratic lawmakers had called for financial firms to help pay for the losses but the draft legislation left the question open for the next US president to tackle.