The historic carnage on Wall Street reverberated across Asia on Tuesday with stock markets in the region plunging after American lawmakers rejected a $700 billion US bank rescue plan aimed at stabilizing the U.S. financial system.

All major Asian stock markets in the region tumbled across the board, succumbing to heightened fears of a broader global financial crisis. Though as trading progressed some rebounded with Hong Kong's market staging a dramatic turnaround to close slightly higher as investors scooped up beaten-down shares.

Japan's benchmark Nikkei stock 225 index slumped 4.12 per cent to close at 11,259.86 — the lowest level since June 9, 2005. In Australia, the S&P/ASX-200 index fell 4.3 per cent after falling as much as 5.3 per cent.

Hong Kong's Hang Seng index gained 0.76 per cent to close at 18,016.21 after earlier plunging more than five per cent. India's Sensex was up 2.4 per cent in afternoon trading.

Japanese Prime Minister Taro Aso urged the country's financial officials to closely monitor the situation and take appropriate measures to protect the world's No. 2 economy, according to Kyodo News agency.

"We have to respond appropriately in order not to affect the Japanese economy and to prevent the financial system from falling apart," Aso said.

Japan's banks have relatively little exposure to the bad mortgages at the core of the global credit crisis, but investors are worried that a slowdown in the U.S. and global economy will hurt demand for exports.

U.S. House Speaker Nancy Pelosi gestures during a Monday news conference on Capitol Hill in Washington after the House vote on the financial bailout package. (Susan Walsh/Associated Press)

Traders were stunned by the U.S. House of Representatives' rejection Monday of a $700 billion US emergency bailout package that would have allowed the government to buy bad mortgages and other sour assets held by troubled banks and other financial institutions. With elections in November, many lawmakers were unwilling to take the political risk of supporting a measure that many American voters see as an undeserved bailout for rich, reckless investment bankers.

"While the legislation may have failed, the crisis is still with us," House Speaker Nancy Pelosi said at a news conference Monday afternoon after the bill's defeat.

U.S. President George W. Bush, who will make a statement Tuesday, and presidential candidates urged legislators to return to the table to pass a law.

U.S. markets tank after Monday's vote

The Dow Jones industrial average plunged 777 points Monday, its biggest single-day drop, or nearly seven per cent, to 10,365.45, its lowest close in nearly three years.

"This is a bad development," Australian Prime Minister Kevin Rudd told reporters in the capital, Canberra. He urged U.S. lawmakers to urgently return to negotiations to come up with a deal that will prevent further infection of world markets.

Rudd said Australia's banking system was better regulated than the U.S. system and was better prepared for financial shocks, but that the failure to pass the package was another worrying sign in already tough times.

"The attitude that we will adopt, and I believe other friends and allies of the United States will adopt, is to urge the United States Congress to pass this or a similar measure when it is re-presented to the Congress," he said.

Australia's benchmark S&P/ASX-200 index fell more than 5.3 per cent within half an hour of the opening, but trimmed some losses as trading progressed. By afternoon trading, it was down 3.7 per cent.

The key index in Taiwan's stock market, closed Monday for a typhoon, fell as much as 6.1 per cent, even though Vice-Premier Paul Chiu urged investors to have confidence in the island's export-driven economy and its financial markets.

The chaos also sapped the U.S. dollar overnight. The greenback was trading at 104.14 yen Tuesday morning in Asia from above 106 yen a day earlier, adding further pressure on major exporters.