Henry Paulson reacts to the failure of the rescue package
The US House of Representatives has voted down a $700bn (£380bn) plan aimed at bailing out Wall Street.
The rescue plan, a result of tense talks between the government and lawmakers, was rejected by 228 to 205 votes in the House of Representatives.
About two-thirds of Republican lawmakers refused to back the rescue package, as well as 95 Democrats.
Wall Street shares plunged at the news; the benchmark index saw its biggest daily points fall ever, down 770.
A White House spokesman said that President George W Bush was "very disappointed" by the vote's result.
President Bush on the rejection of the bail-out plan
Mr Bush later met Treasury Secretary Henry Paulson to discuss the way forward, and was also scheduled to hold talks with Federal Reserve Chairman Ben Bernanke.
Speaking later on the White House lawn, Mr Paulson said the government's plan to address the crisis facing the US financial sector was much too important to be allowed to fail.
US regulators would use "all the tools available" to help the US economy, but their powers were "insufficient", he warned.
He added that he would be working with congressional leaders to get something done "as quickly as possible".
Monday's vote followed a day of turmoil in the financial sector.
Wachovia, the fourth-largest US bank, was bought by larger rival Citigroup in a rescue deal backed by US authorities
Benelux banking giant Fortis was partially nationalised by the Dutch, Belgian and Luxembourg governments to ensure its survival
The UK government announced it was nationalising the Bradford & Bingley bank
Global shares fell sharply - France's key index lost 5%, Germany's main market dropped 4% while US shares plunged after the vote result was announced.
As news of the vote came through, traders on the floor of the New York Stock Exchange stood dumbfounded.
Analysts say that without a bail-out plan, the banks will be left to handle all their own bad mortgage debt as best they can and more of them will be in danger of going bust.
"There's a monster amount of fear out there," said Joe Saluzzi, a trading manager.
"This is global contagion. It's no longer just the United States," he told Reuters news agency.
Mr Bush had argued that the bail-out plan was a "bold" one which he was confident would restore strength and confidence to the US economy.
But after a several hours of impassioned debate, the bill's opponents - the majority of whom were from the Republican Party - got their way.
They had raised concerns about both the content of the plan and the speed with which they were being asked to pass it.
Some agreement on issues such as oversight, greater protection for taxpayers and curbs on executive bonuses had been reached in fraught weekend talks.
These concessions, however, ultimately failed to persuade enough lawmakers that the plan was in the best interests of the nation.
The no vote plunged the world of Washington politics into turmoil, reports the BBC's Kevin Connolly from the US capital.
Pelosi urges bipartisan approach
So grave are the consequences of this decision, our correspondent says, that the speaker of the house paused for several long minutes after the vote was taken before declaring it official.
"The legislation has failed, the crisis has not gone away," said Nancy Pelosi, the house's Democratic speaker.
She said that 60% of Democrats had supported the bill, and urged both sides to try again to find a resolution.
"We must work in a bipartisan way in order to have another bite at the apple in terms of some legislation," she said.
Republican leaders, meanwhile, criticised a scathing speech by Ms Pelosi about the Bush administration's economic policies for injecting partisanship into the issue and scuttling the vote.
Republican house leader John Boehner said: "We could have gotten there today had it not been for the partisan speech that the speaker gave on the floor of the House".
The speaker's words, he said, "poisoned our conference, caused a number of members that we thought we could get, to go south".
Call for calm
Republican presidential hopeful John McCain accused Democrats of infusing the debate with an unhelpful partisan approach.
"Now is not the time to fix the blame, it's time to fix the problem," he added.
He urged members of Congress to go back to the drawing board "immediately" and work out a new deal.
His Democratic rival Barack Obama countered that it was an outrage that ordinary people were being asked to clean up Wall Street's mess.
HAVE YOUR SAY
I am glad the bailout bill failed. I work five days a week, save cash and pay my bills. I did not want to pay for Corporate America's greed
"If I am president I will review the entire plan on the day I take office to make sure that it is working to save our economy and (that) you get your money back," he said.
He added that he expected Congress to pass a bail-out bill in some form.
Lawmakers from both parties have called for further talks on new bail-out legislation.
Frantic steps will now be taken to get some kind of amended version of the bill through Congress, our correspondent says.
But, he adds, this vote would have shaken the confidence of the financial world and the ability of America's leaders to come up with convincing answers at a moment of crisis.
UK Prime Minister Gordon Brown said he was disappointed by the vote's failure, adding that he was doing everything he could to protect the British economy.