The U.S. Senate is set to vote Wednesday night on a $700-billion US financial bailout plan that was narrowly defeated Monday in the House of Representatives.

Following a day of closed-door negotiations on Capitol Hill, Democratic Majority Leader Harry Reid and Republican Leader Mitch McConnell said the Senate will add a tax-cut package that was already rejected by the House on Monday.

While the decision may appease Republicans, it could prove a sticking point with House leaders who want a popular measure extending certain business tax breaks to be financed by tax increases elsewhere in the code.

Federal deposit insurance limits would also be raised from $100,000 to $250,000 under the Senate plan.

The measures are meant to attract at least 12 more House votes in favour of the plan, which was defeated Monday 228-205. The House will reconvene Thursday.

Sen. Charles Schumer called the Senate vote "a brilliant move" that will "help pick up votes on both sides of the aisle."

House Speaker Nancy Pelosi, however, was more reserved in her reaction.

"The Senate has made a decision about how to proceed and what can pass that body," she said. "The Senate will vote tomorrow night, and the Congress will work its will."

Presidential candidates Barack Obama and John McCain, who are both senators, have confirmed they will travel to Washington to attend the vote.

U.S. President George W. Bush makes a statement about the economic bailout bill and financial crisis on Tuesday at the White House. (Charles Dharapak/Associated Press)

In a sombre televised statement Tuesday morning, U.S. President George W. Bush urged Congress to act to prevent "painful and lasting" damage to the economy following the failure to pass the rescue package for the country's ailing financial sector.

"Congress must act," Bush said in a statement from the White House before the North American markets opened.

The economy is at a critical moment and is depending on "decisive action on the part of our government," Bush said.

"We're in an urgent situation and the consequences will grow much worse with each day if we do not act. If our nation continues on this course, the economic damage will be painful and lasting."

Package rejected by vote of 228-205

Bush said he was disappointed by the 228-205 vote on Monday afternoon that rejected the bailout package.

Proponents of the deal will now be trying to determine what kind of compromises are needed to bring the opponents on board, said CBC reporter Alison Smith from Washington.

Part of the challenge is that the United States is just weeks away from its Nov. 4 election and some Congressional representatives are finding it difficult to approve legislation that Americans seem to overwhelmingly oppose, Smith said.

"They've been unable to persuade Americans that this is something more than just a bailout package for corporate fat cats," she said.

The president said he wanted to assure Americans and "citizens around the world" that the rejected bill is not the end of the legislative process.

Asian investors reacted adversely to news of the bailout defeat, which came after stock markets there had closed Monday. Australia's market lost 4.3 per cent, while Japan's Nikkei index dropped 4.1 per cent.

However, things were brighter Tuesday in North America and Europe. Toronto's TSX composite index jumped 467 points, while the Dow Jones rose 485 points in New York. Britain's FTSE 100 was up 1.74 per cent, France's CAC 40 gained 1.99 per cent and Germany's Dax rose 0.4 per cent.

The bailout would have seen the U.S. government immediately buy as much as $350 billion in distressed debt held by Wall Street banks and investment houses, with a further $350 billion available later. Much of the bad debt is linked to the collapse of the subprime mortgage market.

Too much for firms, too little for Americans?

The government could have held on to the debts for several years, possibly until credit markets settled and house prices recovered, and it could then sell the debt at a profit.

Critics of the plan said it would have done too much for Wall Street firms and moguls, and too little for the average American. Alternative plans discussed by pundits included having the government provide mortgage relief directly to homeowners, as well as loan guarantees for people at risk of losing their houses to stave off or even reverse a foreclosure.

Some Republicans in the House of Representatives had pushed for raising the limit on federal deposit insurance to $250,000 from $100,000. Within hours Tuesday, Federal Deposit Insurance Corp. Chairman Sheila Bair asked Congress for temporary authority to raise the limit by an unspecified amount.

Bair said the increase could reassure nervous savers and help ease a crisis of confidence in the banking system.

The ultimate cost of the bailout would likely be much less than the $700 billion authorized by the legislation, Bush repeated Tuesday.

Obama, McCain echo need to act

Obama and McCain on Tuesday urged Congress to continue working on the legislation after Bush's statement.

Campaigning in Nevada, Obama called on politicians to put partisanship aside and stop worrying about the election.

Republican candidate McCain, in an interview with CNN, said it is the job of political leaders to come up with an immediate solution and a long-term approach to the crisis.

World leaders on Tuesday were also urging the United States to act .

The rejection of the bailout plan has had major impacts on the world economy, said Japan's economy minister, Kaoru Yosano.

French President Nicolas Sarkozy, who holds the European Union presidency, said Europe's four main economic powers were to meet in Paris in the coming days to prepare for a larger summit to deal with the meltdown.

The European Commission urged the United States to show "statesmanship" in the financial crisis.

The EU is disappointed the House of Representatives rejected the rescue package, said commission spokesman Johannes Laitenberger.

"The turmoil that we are facing has originated in the United States. It has become a global problem," Laitenberger said.

German Chancellor Angela Merkel said the quick passage of a rescue package is "the precondition for creating new confidence on the markets — and that is of incredibly great significance."

With files from the Associated Press