It was trailed as a vote on the biggest proposed government intervention in the US economy since the Great Depression of 1929.
A vote which, if it failed, would trigger a meltdown not just in Wall Street but in every town and city in the US.
Senior US politicians and financial analysts warned that a negative outcome would have disastrous repercussions for the entire global economy.
President George W Bush painted an apocalyptic scenario should US Treasury Secretary Henry Paulson's $700bn (£380bn) Wall Street bail-out be rejected.
"If money isn't loosened up, this sucker could go down," Mr Bush was reported to have declared late last week.
Mr Paulson himself was reported to have resorted to getting down on his knees as he pleaded with Nancy Pelosi, the US Democratic House of Representatives Speaker, to help him save the deal.
A tentative agreement to avoid "a long and painful recession" was reached on Sunday by key Democratic and Republican negotiators.
Last night, however, a drama of Holywood proportions unfolded as the lower House of the US Congress rejected the plan by 228 votes to 205.
About two-thirds of Republicans voting refused to back the rescue package, as well as 95 Democrats, sending US stocks plunging.
The blue chip Dow Jones industrial average posted its biggest one-day points drop in history.
Global stocks had earlier plummeted amid fears of a rejection of the bail-out following more than a week of intensive closed-door negotiation to find a solution.
Opponents had raised concerns about both the content of the plan and the speed with which they were being asked to pass it. Fears over the burden for US taxpayers ranked high.
Mr Bush had appeared on television early yesterday to appeal to Congress to back the package.
He defended the unpopular proposal, saying it was not a rescue of corporate fat cats. "A vote for this bill is a vote to prevent economic damage to you and your community," the president said.
The vote was preceded by unusually aggressive White House lobbying, with aides saying that Mr Bush had used a call list of people he wanted to persuade to vote "Yes" a short time before the vote.
Legislators shouted news of the plummeting Dow Jones average as they crowded on the House floor during the drawn-out and tense call of the roll, which dragged on for roughly 40 minutes as leaders on both sides scrambled to corral enough of their rank-and-file members to support the deeply unpopular measure. They found only an extra two.
After three hours of debate on Capitol Hill, House majority leader Steny Hoyer warned representatives that the cost of inaction would be an economic calamity beyond Wall Street.
"A meltdown would begin, it is true, on a few square miles of Manhattan, but before it was over, all of us know, no city or town in America would be untouched," Mr Hoyer said.
A scene of high drama developed as the vote appeared to be failing.
The House briefly kept it open after the end to give senior figures from both parties the chance to try and force those in opposition to change their minds. But within a few minutes it was announced the vote had been formally closed, leaving the plans in disarray.
Financial analysts were predictably gloomy after the failed vote.
"There's a monster amount of fear out there. This is global contagion. It's no longer just the United States," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.
"I can't believe they weren't able to come together and come up with a solution. Complete disaster was predicted if it didn't pass," Stephen Berte, senior equity trader at Standard Life in Boston, said. "I can't see what the upside is right now."
Republicans alleged that a speech by Ms Pelosi, which blamed the crisis on the policies of the Bush administration, prompted wavering Republicans to vote against the bill.
"We could have gotten there today had it not been for this partisan speech by the speaker on the floor of the House," Republican John Boehner, the house minority leader said. He said Ms Pelosi's speech "poisoned" efforts to get Republicans to back the bill.
Ms Pelosi did reply to the allegation but said Democrats were convinced by Mr Paulson that a ballot was needed to prevent meltdown.
She added: "We delivered on our side of the bargain ... clearly that message hasn't been received yet by the Republican caucus."
White House spokesman Tony Fratto said Mr Bush was "very disappointed" by the outcome.
"There's no question that the country is facing a difficult crisis that needs to be addressed," Mr Fratto told journalists. He said the president planned to meet members of his team later yesterday "to determine next steps".
Democratic presidential candidate Barack Obama, speaking in Colorado shortly after the vote, said it was an outrage that ordinary people were being asked to clean up Wall Street's mess.
Mr Obama said however, he believed Congress would ultimately pass the bailout plan despite the rejection by the House of Representatives.
"I'm confident that we're going to get there. It's going to be a little rocky," he said, adding that "things are never smooth in Congress."
The Democratic White House hopeful said that he had spoken by phone with Mr Paulson and Ms Pelosi and other legislators following the rejection of the measure by representatives yesterday.
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