A planned $14-billion US federal bailout of the Big Three carmakers died Thursday on the U.S. Senate floor after negotiations between Democrats and Republicans collapsed over a dispute about wage cuts for autoworkers.

The Senate rejected the bailout 52-35 on a procedural vote — well short of the 60 votes needed to pass the plan.

Ahead of the vote, Democratic Senate Majority Leader Harry Reid said he was "terribly disappointed" to see several hours of unprecedented private talks in Washington with Senate Republicans, representatives from the country's auto industry and labour groups come to naught.

"There's too much difference between the two sides," Reid said from the Senate floor.

Asian financial markets fell sharply Friday as news of the failure emerged, with the Nikkei and Hang Seng both down more than five per cent. Reid could only speculate on the potential fallout when North American stock markets opened.

"I dread looking at Wall Street tomorrow," Reid said late Thursday night. "This could be a very, very bad Christmas as a result of what takes place here tonight."

Early indications were that Wall Street would incur a steep sell-off. The Dow Jones industrial average futures contract retreated three per cent overnight from its close Thursday afternoon, suggesting the index will open significantly lower on Friday.

Earlier in the evening, Reid said a tentative deal had been reached and the Senate could vote on legislation that night, but just hours later he asked to invoke closure to end the nighttime legislative session without an agreement.

The deal stalled over the United Auto Workers' refusal to accede to Republican demands for swift wage cuts before their current contract expires in 2011.

'3 words away' from accord: Republican negotiator

The House of Representatives had passed legislation on Wednesday to speed the bailout package to approval. But prospects for the Senate to pass the rescue funds dimmed early Thursday amid strong Republican opposition, despite urgent appeals by both president-elect Barack Obama and the Republican administration of President George W. Bush.

"We have reached an impasse," said Senate Republican Leader Mitch McConnell, who came out against the legislation — the product of a hard-fought behind-the-scenes compromise between the majority Democrats and the White House.

Bob Corker, a Tennessee Republican senator who led the closed-door talks for his party, said the two sides were "three words away, maybe two" from reaching landmark legislation that would have allowed the automakers to go forward "stronger than they have been in 40 years."

"I think there is a way for us to get there; I still do," Corker told the Senate.

After the vote, White House spokesman Tony Fratto said the Bush administration found it "disappointing" that lawmakers failed to act to avoid disorderly bankruptcies.

"We will evaluate our options in light of the breakdown in Congress," Fratto said.

Can't just stand by: Obama

In Chicago, Obama told reporters that the government can't just stand by and watch the industry collapse, saying that would have a "devastating ripple effect" throughout the economy.

Proponents of the package scrounged for the Senate votes to clear the legislation as early as Thursday afternoon. The president was lobbying for the bill, as well, arguing that the economy can't stand massive new layoffs.

But McConnell said the measure "isn't nearly tough enough." The Republican Senate leader also called for a different bill — one that would force U.S. automakers to slash wages and benefits to bring them in line with Japanese carmakers Nissan, Toyota and Honda — in return for any federal aid.

That approach was virtually certain to be a non-starter among Democrats who count labour unions among their strongest supporters.

Many Republicans remained staunchly opposed to the bailout, and some Democrats were ill or absent from the emergency, post-election congressional session. Supporters of the bailout acknowledged that in this scenario, getting the requisite 60 votes to pass it would be very difficult.

The stalemate highlighted the difficulty of pushing another rescue package through a bailout-fatigued Congress, particularly one designed to span the administrations of a lame-duck president and his successor, even though they were united in pressing hard for its swift approval.

With files from the Associated Press