Pat Dollard | Young Americans

By CNBC

Global stock markets braced for a sharp declines on Tuesday, with Asian markets getting hammered in the morning session, after the House’s rejection of a $700 billion financial bailout sparked a broad selloff in the U.S..

Japan’s Nikkei 225 Average [JP;N225 11345.37 -398.24 (-3.39%)] fell roughly 5 percent Tuesday, hitting its lowest level this year, following the Dow Jones Industrial Average’s 7 percent plunge. Hong Kong’s Hang Seng Index was down a whopping 6 percent.

US stock futures were pointing to a lower open on Tuesday as well.

“Short term, the market is getting crushed. But more importantly, we are telling clients we could be at the beginning of a whole new down phase,” said Bill Strazzullo, partner and chief market strategist at Bell Curve Trading in Boston.

He said the benchmark S&P 500 falling to the 1,000 level was not out of the question.

“We have to see what happens here,” Strazzullo said. “It is totally uncharted. I think it is very difficult to gauge. It’s not trying to predict an economic event. It’s a political event and you never know what is going on behind the scenes.”

Though Republicans and Democrats vowed to renegotiate a revised bailout proposal, it was unclear whether any plan would be able to pass Congress now.

Analysts said the freezing of credit markets and signs that more and more banks are now succumbing to the strains stemming from the U.S. housing slump probably will fuel more volatility.

U.S. short-term interest rate futures surged higher on Monday, sharply increasing the implied chances for a big Federal Reserve rate cut in October due to worries about the economy and the financial system.

Futures now show more than a 50-percent chance that the Fed will slash its benchmark lending rate by 50 basis points in October, to 1.5 percent, up from 32 percent late on Friday.

“The big thing this market wants is some type of a resolution on whatever bailout plan we get,” said Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research in Cincinnati, Ohio. “Fear seems to be really ramping up. Tomorrow’s open is going to be the most anticipated opening since the reopening of the market on Sept. 17, 2001.”

That day, which was a Monday, marked the first day of trading after the Sept. 11 attacks on the United States in 2001.

The failure of the bailout bill—after more than a week of intensive closed-door negotiations intended to hammer out a compromise plan—brought new uncertainty about the response of the U.S. government to the worst financial crisis since the Great Depression.

President Bush was set to huddle with economic advisers to consider the administration’s next move.

Any action, however, might be complicated by the observation of Rosh Hashanah, the Jewish New Year holiday, from sunset on Monday, Sept. 29, until sunset on Wednesday, Oct. 1.

“The world is obviously looking for some type of leadership from the United States, but the crisis is bigger than just the U.S. obviously,” said Detrick.

The White House Monday said it was “very concerned” about the financial markets, which were in turmoil after the House of Representatives rejected a $700 billion rescue plan for the U.S. financial system.

“We thought there would be enough support for this legislation on the Hill, we’re very concerned about the markets,” President Bush’s spokesman Tony Fratto said on CNN.

He added that the White House wanted to hear from Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke.

Asked about the markets plunging after the vote, Fratto said: “We never wish to see a decline in the markets. It’s not something that we would want to see now.”

Asian Stocks Nose Dive After Rejection of Bailout

TOKYO — The historic carnage on Wall Street reverberated across Asia Tuesday, with stock markets in the region plunging after U.S. lawmakers rejected a US$700 billion bank rescue plan aimed at stabilizing the U.S. financial system.

All major Asian stock markets in the region tumbled across the board, succumbing to heightened fears of a broader global financial crisis.

Japan’s benchmark Nikkei 225 index nose-dived more than 544 points, or 4.6 percent, to 11,199.07, with popular stocks like Sony Corp. down 6.8 percent and Toyota Motor Corp. down 4.6 percent.

In Hong Kong, the Hang Seng index sank 3.6 percent. Markets in Australia, South Korea and the Philippines were also down sharply.

Japanese Prime Minsiter Taro Aso urged the country’s financial officials to closely monitor the situation and take appropriate measures to protect the world’s No. 2 economy, according to Kyodo News agency.

“We have to respond appropriately in order not to affect the Japanese economy and to prevent the financial system from falling apart,” Aso was quoted as saying.

Japan’s banks have relatively little exposure to the bad mortgages at the core of the global credit crisis, but investors are worried that a slowdown in the U.S. and global economy will hurt demand for exports.

Traders were stunned by the U.S. House of Representatives’ rejection Monday of a US$700 billion emergency bailout package that would have allowed the government to buy bad mortgages and other sour assets held by troubled banks and other financial institutions. With elections in November, many lawmakers were unwilling to take the political risk of supporting a measure that many American voters see as an undeserved bailout for rich, reckless investment bankers.

The Dow Jones industrial average plunged 777 points Monday, its biggest ever single-day drop, or nearly 7 percent, to 10,365.45, its lowest close in nearly three years.

“This is a bad development,” Australian Prime Minister Kevin Rudd told reporters in the capital, Canberra. He urged U.S. lawmakers to urgently return to negotiations to come up with a deal that will prevent further infection of world markets.

Rudd said Australia’s banking system was better regulated than the U.S. system and was better prepared for financial shocks, but that the failure to pass the package was another worrying sign in already tough times.

“The attitude that we will adopt, and I believe other friends and allies of the United States will adopt, is to urge the United States Congress to pass this or a similar measure when it is re-presented to the Congress later this week,” he said.

Australia’s benchmark S&P/ASX-200 index fell more than 5.3 percent within half an hour of the opening, but trimmed some losses as trading progressed. By afternoon trading, it was down 3.7 percent.

The key index in Taiwan’s stock market, closed Monday for a typhoon, fell as much as 6.1 percent, even though Vice Premier Paul Chiu urged investors to have confidence in the island’s export-driven economy and its financial markets.

The chaos also sapped the dollar overnight. The greenback was trading at 104.14 yen Tuesday morning in Asia from above 106 yen a day earlier, adding further pressure on major exporters.