With the US House of Representatives rejecting the $700bn (£380bn) rescue deal, the UK’s FTSE 100 fell as much as 3% before rising 0.6%.
Asian stocks have already seen big declines in Tuesday trading.
Wall Street’s Dow Jones index saw its biggest one-day points fall in history on Monday after the deal was rejected.
Bank shares hit
The UK’s FTSE 100 index was up 31 points or 0.6% to 4,850 by 0915 BST, while Germany’s Dax was down 76 points or 1.3% to 5,731.
France’s Cac was up two points or 0.06% to 3,956.
Banking shares were the biggest fallers in London, as concerns grow about how the delay in securing a rescue deal in the US will hit the financial system.
HBOS was down 12%, Royal Bank of Scotland was 11% lower, and Lloyds TSB had declined 9%.
Japan’s Nikkei index ended Tuesday down 4.1%, and Hong Kong’s Hang Seng had lost 2.4% in late trading.
Meanwhile, in Russia all trading has been suspended on the country’s two main stock markets.
In the Republic of Ireland, the government announced that all bank deposits would be guaranteed for the next two years.
And Franco-Belgian bank Dexia has received a state bailout, with the Belgian, French and Luxembourg governments pumping in a combined 6.4bn euros ($9.2bn; £5bn).
US Treasury Secretary Henry Paulson, the architect of the rescue plan, said it was vital to get a new deal agreed. President George W Bush is now due to make a statement on the deadlock over the bail-out plan later on Tuesday.
But the president has been wholly ineffectual in the crisis so far and it is difficult to see how that might change, says the BBC’s North America correspondent Justin Webb.
Congress will not meet again until Thursday, with another vote unlikely before the weekend, the BBC’s Jonathan Beale in Washington says.
Day of turmoil
The House’s rejection of the bail-out plan came after a day of turmoil in the US and Europe, with Wachovia, the fourth-largest US bank, being bought by larger rival Citigroup. Monday also saw the partial nationalisation of Benelux banking giant Fortis by three governments, and UK lender Bradford & Bingley was taken into state ownership.
The US rescue plan, a result of tense talks over several days 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.
Mr Paulson said, after talks with the president, that 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”.
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.
But after 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.
BBC NEWS, 30 September 2008|