World stocks hit by U.S. bailout rejection

World stocks fell to near three-year lows on Tuesday and investors moved into less risky assets as disappointment over the rejection of a U.S. bank rescue package swept from Wall Street to Asia and Europe.

European shares, however, trimmed early losses and U.S. stock futures suggested gains on Wall Street later in the day, possibly signaling some rethinking by investors about the longer-term chances of support for the financial sector.

Oil also continued its recent tumble, falling to around $94 a barrel.

Angst over the battered financial sector continued with Belgian-French financial services group Dexia getting a 6.4 billion euro ($9.18 billion) capital boost from public shareholders to help it fight the global credit crisis.

European stocks fell as much as 2 percent in early trading and Japan's Nikkei closed 4.12 percent lower.

The falls followed deep losses on Wall Street overnight in the wake of Congress's failure to agree a $700 billion plan to ease trouble in the financial industry. The S&P 500, for example, shed 8.79 percent.

"Markets, and especially credit markets, had expected a strong signal from the authorities, and we didn't get it. The domino effect of bank failures has started and is now spreading to Europe," said Sebastien Barthelemi, analyst at Louis Capital Markets.

"For a long time, we feared the systemic risks, now we're watching the dominos collapse one after another. It's scary."

Globally, MSCI's main world stock index, a benchmark for many leading investors, was down 1 percent, adding to a 6.84 percent loss on Monday that saw the index's market capitalization plunge $1.73 trillion.

The FTSEurofirst 300 index of top European shares was down 1 percent, trimming some losses, having fallen 5.2 percent on Monday.

Banks were taking most points off the European benchmark index. Royal Bank of Scotland fell 9.1 percent, Italy's UniCredit was down 8.6 percent and Swiss UBS lost 3.7 percent.

European financials were hammered on Monday after British mortgage lender Bradford & Bingley was partly nationalized, Belgium, Netherlands and Luxembourg part-nationalized financial group Fortis and the German government and the country's banks teamed up to extend a last-minute credit line to property lender Hypo Real Estate.

Earlier on Tuesday, the Nikkei average hit a three-year closing low, shedding 483.75 points to 11,259.86, the lowest finish since June 2005. It earlier lost nearly 5 percent.

The broader Topix declined 3.6 percent to 1,087.41, after tumbling more than 5 percent at one stage.