Dow rallies after Bush races to rescue bail-out

In the early hours of trading, the Dow Jones rose from 10,365 to 10,634 - or two per cent - in a sign of renewed optimism that the rescue plan, which was rejected by Congress last night, will be agreed later this week.

Hopes rose further asDemocratic presidential candidate Barack Obama and his Republican rival John McCain joined calls for the bail-out to be passed, while senior Congressional leaders on both sides predicted that a deal would be reached. The positive signs emerged minutes after Mr Bush warned that the US economy was facing a "critical" situation if the stalemate over the salvage plan continued.

In a televised plea from the White House, the President claimed that the consequences of delay would worsen with every day that passed without agreement and told Congressional leaders that they had a duty to act for the good of the public. "We are facing a choice between action and the real prospect of economic-hardship for millions of Americans," said Mr Bush. "The reality is that we are in an urgent situation and the consequences will get worse each day if we do not act. If our nation continues on this course, the economic damage will be painful and lasting."

Mr Bush said that despite last night's rejection of his bail-out plan by the House of Representatives, the legislative process was not over, although he declined to give any details of how the package might be revised to meet the objections of critics. The test now will be whether his appeal will sway his opponents or whether - as with his earlier interventions during the financial crisis - it has little impact.

His warning came as Mr Obama called for cross-party unity on a bail-out "without delay".The decision to vote down the scheme to buy up failing mortgage assets sent Wall Street into freefall yesterday. The Dow Jones plunged by 770 points, nearly seven per cent of its value, in its biggest one-day drop ever, triggering further falls across other world markets from India to Hong Kong and Australia.

US Treasury Secretary Hank Paulson and Federal Reserve chairman Ben Bernanke are working on a revised plan in the hope that changing the terms of the bail-out could win over enough opponents to secure congressional backing later this week.

A two-day holiday for the Jewish New Year, Rosh Hashanah, means however that a new vote on the scheme will not be held before Thursday, while there remains no guarantee that even an amended rescue package will win support from Congress.

Mr Paulson also pledged to find a solution to the crisis after holding an emergency meeting with Mr Bernanke at the White House. "We need to put something back together that works," he said.

There are doubts, however, about whether Mr Paulson, seen by some critics as a bankers' friend because of his past career at Goldman Sachs, can win over sufficient Congressional opponents.

At Congress, Democratic leaders said the House would reconvene in the hope of a quick vote on a reworked version, while Republican leaders also pledged to seek to find a solution.

Despite this, there remains no certainty that any deal will be passed. Opposition to the plan - which came from both Republicans and Democrats - was triggered by public hostility to the deal and a reluctance among US lawmakers to be seen to be bailing out well-paid bankers whose reckless lending has caused the crisis.

"This isn't legislation, this is extortion," said Florida's Republican representative Ginny Brown-Waite. "This is so embarrassing it turns the stomach of most Americans." Although the majority of opponents of the bail-out were Republican - with the party's representatives voting 2-1 against - more than 90 Democrats also failed to back the scheme in a sign of the deep divisions that the plan has caused.

An analysis has revealed that most of those opposing the bail-out are in marginal seats in the US elections in November with many saying they were responding to public demands by voting down the deal.

The Democrat House Speaker Nancy Pelosi said she and other party leaders would work to salvage the deal, however, and insisted that it was in the best interests of ordinary Americans. "What happened today cannot stand, we must move forward," she said. "We are here to protect the taxpayer as we work to stabilise the markets."

Mr Obama also predicted that the rescue plan would eventually be backed, saying: "I'm confident we're going to get there. It's going to be a little rocky. Democrats, Republicans, step up to the plate, get it done."

Republican presidential candidate John McCain added: "Now is the time for all members of Congress to go back to the drawing board."