The Dow Jones index was 450 points (4%) lower at 10,690 as the result emerged. The tech-heavy Nasdaq lost 5.9%
On the currency markets the dollar had risen strongly against both the pound and the euro on news that the $700bn US financial bail-out deal was set to be approved, but it then fell back.
Dramatic events
In early New York trade, the euro was trading at $1.4426, off day-lows of $1.4395 but still down 1.3% on the day.
The market moves came on another eventful day of global financial turmoil, which BBC Business Editor Robert Peston described as the "worst" since the credit crunch began.
Lack of progress
Developments include:
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UK
buy-to-let specialist Bradford and Bingley being nationalised with the government taking control of B&B's mortgages and loans, while its savings arms is being bought by Abbey.
In the share markets, financial stocks bore the brunt of the falls. In London, Lloyds TSB ended the day down 13.5%, Royal Bank of Scotland shares plummeted 12.9%, HBOS dropped 18% and Barclays closed down 8.8%.
the fourth-largest US bank, was bought by larger rival Citigroup in a rescue deal backed by US authorities
Earlier on Monday, the UK Government had confirmed that it was taking over B&B's mortgage portfolio, while the bank's savings business and branches were being sold to Spanish bank Santander.
banking giant Fortis was partially nationalised by the Dutch, Belgian and Luxembourg governments to ensure its survival
"There's a feeling abroad that the US (rescue package) was a grudging affair, we were talking about this a week ago and we're not that much further on," said Peter Dixon, UK economist at Commerzbank.
Icelandic government took control of the country's third-largest bank, Glitnir, after the company had faced short-term funding problems
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banks gave a massive liquidity injection to try to ease the credit squeeze
"News that part of the Bradford & Bingley is being nationalised is not helping and there's a sense that there's a lot more bad news to come."
London's FTSE 100 index closed at 4,818.77 points - with several banking shares losing more than 10% of their value.
European shares hit
In the US, the Dow Jones was down 2.3% while the tech-heavy Nasdaq slipped 4.8%.
In Germany, shares in Hypo Real Estate closed down 73.9%. The commercial property lender announced it had struck a deal with a consortium of banks for a multibillion euro line of credit to secure its future.
Germany's Dax index closed 4.2% lower while France's Cac 40 slid 5%.
Shares in Commerzbank ended down 24% while Deutsche Bank's shares also took a battering, falling 7.7%.
"There is a contagious effect," said Darren Winder, head of macro and strategy research at Cazenove.
In France, shares in Credit Agricole fell 9.2% and financial services firm Dexia ended down 28.5% on fears it might need emergency capital.
"The implications of a fallout from (the credit crunch) are far-reaching, there are dozens of quoted banks in Europe, so it would seem unlikely that they would all be unaffected by this."
A spokesperson for Dexia said its liquidity was "very good" but added the situation on the financial markets had to be "constantly monitored".
The lack of support of the lower house of the US Congress for the plan to bail out Wall Street came after President Bush urged the House of Representatives to pass it.
Asian caution
The bill is designed to end the credit crunch - and send a strong signal to the markets.
Earlier in Asia, investors had remained cautious as they waited to see the detail of the US rescue package.
President Bush said: "I'm confident that this rescue plan, along with other measures taken by the Treasury Department and the Federal Reserve, will begin to restore strength and stability to America's financial system and overall economy."
In Japan, the benchmark Nikkei 225 index closed down 1.3%. In Hong Kong, the Hang Seng index closed down more than 4%.
Analysts said that the market downturn was not surprising after the latest fall-out from the banking sector.
"Investors want to wait to see how the US plan works," said Yukio Takahashi, market analyst at Shinko Securities.
"They haven't been able to pass judgement on it yet."
