Reuters | September 30, 2008
By Tony Munroe and Jason Neely

HONG KONG/LONDON (Reuters) - Bank rescues spread in Europe on Tuesday after U.S. lawmakers' unexpected rejection of a $700 billion bailout.
 
France joined Belgium and Luxembourg in a 6.

French President Nicolas Sarkozy began talks on the crisis with finance executives on Tuesday and has said he will meet this week with officials from Europe's G8 member states -- Germany, France, Britain and Italy.

"Market meltdown is likely to continue unless an alternative (U.S.) plan is passed, which may or may not happen this week," Dariusz Kowalczyk, chief strategist at CFC Seymour in Hong Kong, said in a note.

Facing the worst financial crisis since the Great Depression, global central banks scrambled again to try to relieve a severe squeeze in money markets by more than doubling the amount of dollar funding to $620 billion.

Among European banks top losers were Royal Bank of Scotland, Britain's HBOS, and Italy's UniCredit.

Bans on short-selling stocks spread to Russia, South Korea and Taiwan. Nervous investors piled into gold and U.S. Treasuries. Oil fell on fears of further economic slowdown, and the Japanese yen hit a 4-month high.

Wall Street suffered its worst fall since 1987 on Monday, but stock futures indicated a higher opening on Tuesday.

With Tuesday's end of the financial quarter, Christian Noyer, a European Central Bank governing council member, sought to reassure investors.

"There is no reason to be frightened and to give in to panic," Noyer said on France's RTL radio.

"I don't say there won't be things that will appear in the accounts that are published in the next weeks or months but there is no drama in front of us."

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.

Treasury Secretary Henry Paulson said he would continue to work with Congress to formulate a bill that could pass after lawmakers rejected the plan he put together with Federal Reserve Chairman Ben Bernanke.

The Senate returns on Wednesday and the House on Thursday after a break for the Jewish New Year holiday of Rosh Hashanah. No laws can be passed in their absence but their staffs could work on a revised plan.

U.S. presidential candidates Barack Obama and John McCain had both offered qualified support for the bailout, which now dominates the election just over a month away.

Obama, a Democrat, said he believed lawmakers would regroup to pass a financial rescue plan. "I'm confident we're going to get there," he said as he campaigned in Colorado. "It's going to be a little rocky.

Republican House members voted against the rescue package by a more than 2-to-1 margin. A majority of Democrats voted in favor.

Failure to pass it after more than a week of high-pressure talks has triggered concerns that the United States economy risks falling into a painful recession which 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.

U.S. President George W. Bush was scheduled to make a statement on the bailout at 8:45 a.m. EDT on Tuesday.

"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," he told reporters in Washington.

Lawmakers accused the administration of presenting 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.

(Additional reporting by Kevin Plumberg in HONG KONG, Elaine Lies in TOKYO, Wayne Cole in SYDNEY, Saeed Azhar in SINGAPORE; Patrick Rucker and Kevin Drawbaugh in WASHINGTON, James Mackenzie and Tim Hepher in PARIS; Editing by Andrew Callus)