What happens next?

Recession fears mounted and investors raced for safe havens after U.S. lawmakers unexpectedly rejected a $700 billion bailout plan for the
financial industry, but Asian stocks trimmed deep early losses after Wall Street's biggest fall since the crash of 1987.

A week that started badly with the rescue of three banks in Europe and the distressed sale of big U.S. lender Wachovia to Citigroup grew worse after the U.S. Congress was unable to agree on a rescue package.

"It's hard to imagine what's going to happen. It's kind of scary," said Masayoshi Okamoto, head of dealing at Jujiya Securities in Tokyo. "In particular, European banks were putting up a front that nothing was wrong, but now they're falling one after another."

Shares in Asia recovered from early lows but were still down about 3 percent.

Uncertainty about what comes next, and whether Washington can come up with compromise legislation to relieve the worst financial crisis since the Great Depression sent investors into gold and U.S. Treasuries. Oil fell on fears of further economic slowdown, and the Japanese yen hit a 4-month high.

Investors worried that a collapse in financial markets would tip the United States economy into a painful recession that drags the rest of the world down with it.

"We do not rule out a U.S. recession being deep and long and having a severe global impact," said Gerard Lyons, chief economist at Standard Chartered in London.

However, Kansas City Federal Reserve Bank President Thomas Hoenig said that despite a sense that "the sky is falling", the U.S. economy is resilient and will emerge stronger from the current credit crisis.

"We need to take a deep breath and think about what is happening," Hoenig said at a Kansas City Fed economic forum in Gering, Nebraska.

Bush, disappointed

U.S. President George W. Bush was scheduled to make a statement on the rescue package at 1245 GMT on Tuesday after meeting on Monday with economic advisers including Federal Reserve Chairman Ben Bernanke to consider the administration's next move.

"I was disappointed in the vote that the United States Congress (had) on the economic rescue plan," Bush told reporters in Washington. "Our strategy is to continue to address this economic situation head-on and we'll be working to develop a strategy that will enable us to continue to move forward."

Both supporters and opponents complained about the way the administration presented the proposal as an urgent demand, accompanied by warnings of potential economic collapse, after years of sky-rocketing Wall Street bonuses, abusive mortgage lending, and regulatory neglect by the administration.

Global central banks scrambled to relieve a severe squeeze in money markets by more than doubling the amount of dollar funding to $620 billion as banks hoarded cash, bracing for more trouble ahead in the worsening credit crisis.

In moves to arrest market slides, regulators in South Korea banned short-selling of stocks and Taiwan said it would place tighter limits on short-selling, while Hong Kong said it was ready to take aggressive measures against abusive short sellers.