Dow in record drop on U.S. bailout rejection

By Steven C. Johnson

NEW YORK (Reuters) - The Dow industrials plunged on Monday in their biggest decline ever after U.S. lawmakers unexpectedly rejected a $700 billion (388 billion pound) financial bailout, spooking investors who fear for the future of global markets and the U.S. economy.

The Dow lost 778 points, its largest point decline in history, and posted its biggest daily percentage slide since the 1987 stock market crash. The benchmark S&P 500 also had its worst day in 21 years after the House voted down the bailout plan by a count of 228 to 205.

The failure of the bill, which would have let the Treasury buy up bad mortgage debt from struggling banks in an effort to kick-start much needed lending, was seen as crucial to shielding the economy from an even deeper slowdown.

That further unnerved investors who on Monday saw the credit crisis claim several new victims, including Wachovia Corp and a bevy of European banks.

Fear ran deep and widespread, as investors dumped stocks for the relative safety of U.S. government bonds. The Chicago Board Options Exchange Volatility Index, Wall Street's main barometer of investor fear, jumped 39 percent to 48.40, a nearly six-year high, and ended at 46.72 -- a record high.

"I am shocked. Credit markets were struggling even with the prospect this bill was going to get passed. Now the bill doesn't get passed and it just throws one more monkey wrench into the mix," said Bob Doll, global chief investment officer of equities at BlackRock Inc, one of the world's largest asset managers.

The Dow Jones industrial average sank 777.68 points, or 6.98 percent, to 10,365.45. The Standard & Poor's 500 Index dropped 106.59 points, or 8.79 percent, to 1,106.42. The Nasdaq Composite Index lost 199.61 points, or 9.14 percent, to 1,983.73.

The tech-heavy Nasdaq had its worst day since April 2000 when the Internet bubble collapsed. U.S. stock index futures were unchanged.