Equity markets plunged into the red and the dollar dived yesterday as jittery investors awaited more details of the US government's $700bn rescue plan for the stricken financial sector and digested news that investment bank Morgan Stanley has agreed to sell a 20% stake to Mitsubishi UFJ Financial Group, Japan's largest bank.

Although market players welcomed the move by US federal authorities to relieve American banks of toxic assets, they are uncertain how successful the plan will be in loosening up frozen credit markets and propping up the slumping housing market.

The major European stock exchanges closed lower and Wall Street dived by more than 200 points in early trading on concern that Congress may hold up passage of the measures. It later recovered briefly but went on to finish more than 370 points down.

The dollar was lower against the pound and other major currencies in European trading.

In London, the top share index ticked down as weakness in banks HBOS, HSBC, Barclays and Standard Chartered offset gains in miners and energy stocks. The FTSE-100 blue-chip barometer ended the session 75.07points off at 5236.26.

In an attempt to prevent a legislative logjam, President George W Bush piled pressure on congressional leaders, saying the "whole world" is watching to see if Republicans and Democrats can quickly agree on a plan to halt the US financial crisis without adding extra elements to the legislation.

Bush's action came as some leading congressional Democrats called for a cautious, deliberative approach to stabilising troubled financial markets.

Senate Democrats are proposing to add US government help for homeowners and limits on executive compensation to the government's financial bail-out of Wall Street.

A draft of the plan shows that Senate Banking Committee chairman Christopher Dodd also wants the government to get a stake in the companies helped by the unprecedented rescue.

The measure would end the programme at the end of next year, instead of creating a two-year initiative as the Bush administration has requested.

It also would add layers of congressional scrutiny, including an emergency board to keep an eye on the programme with two House and Senate appointees.

The president said that such efforts would "undermine the effectiveness of the plan."

Bush added: "Indeed, the whole world is watching to see if we can act quickly to shore up our markets."

White House officials and congressional leaders met during the weekend on the rescue plan, the main thrust of which congressional leaders have endorsed.

Treasury Secretary Henry Paulson's plan, sent to Congress on September 20, would mark massive government intrusion into markets and increase America's debt ceiling by 6.6% to $11.315 trillion.

The US Treasury Department said it is planning to buy up to $700bn of assets, mostly residential and commercial mortgage-backed assets. It may sell them or hold them to maturity, and the actual management will be done by outside money managers.

However, Paul Mortimer-Lee, an analyst at BNP Paribas, said the Treasury Department has not said what price will be paid. If the Treasury pays market prices, there is no particular incentive for banks to sell to it; and if the government pays above-market value, then it is a taxpayer subsidy of dodgy assets, he noted.

Other questions remain over whether banks which sell those assets will be subject to stricter rules or be forced to find more capital, or whether there will be any sharing of gains or losses.

Representative Barney Frank, chairman of the House Financial Services panel and a Democrat from Massachusetts, accused Paulson of pushing too hard to get out a bill quickly.

Dodd, a Connecticut Democrat, also said there will be a division of thought in Congress about how best to proceed on the bill. He said many in Congress believe a legislative relief package should be done in a measured, careful manner and should be tailored to protect taxpayers in the best way possible.

Dodd spoke a day after the government approved a request by investment houses Goldman Sachs and Morgan Stanley to change their status to bank holding companies.

That change will allow the two institutions to set up commercial banks that will be able to take deposits, significantly bolstering the resources of both companies.

Meanwhile, the Group of Seven, an organisation of the world's leading economic powers, pledged to do all it could to help ease the crisis. The group said that it welcomed the extraordinary steps the US has taken so far.

On the corporate front, Morgan Stanley said it signed a letter of intent to sell up to 20% of the company to Mitsubishi UFJ. Financial terms of the deal were not disclosed.

If the transaction is completed, the price would be based on Morgan Stanley's book value after the Japanese bank completes a due diligence review.

In a separate deal, Nomura, Japan's largest brokerage, said it had reached agreement to buy the Asian operations of bankrupt Lehman Brothers.