The failure of the bailout package in Congress literally dropped jaws on Wall Street and triggered a historic sell-off — including...

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NEW YORK — The failure of the bailout package in Congress literally dropped jaws on Wall Street and triggered a historic sell-off — including a terrifying decline of nearly 500 points in mere minutes as the vote took place, the closest thing to panic the stock market has seen in years.

The Dow Jones industrial average lost 777 points Monday, its biggest single-day point fall ever, easily beating the 684 points it lost on the first day of trading after the Sept. 11, 2001, attacks.

In percentage terms, the Dow’s 7 percent drop was only its 17th-biggest decline, far less severe than the 20-plus-percent drops on Oct. 19, 1987, and before the Great Depression.

As uncertainty gripped investors, the credit markets, which provide the day-to-day lending that powers business in the United States, froze up even further.

At the New York Stock Exchange, traders watched with faces tense and mouths agape as TV screens showed the House vote rejecting the Bush administration’s $700 billion plan to buy up bad debt and shore up the financial industry.

Activity on the trading floor became frenetic as the “sell” orders blew in. The selling was so intense that just 162 stocks on the Big Board rose, while 3,073 dropped.

The Dow Jones Wilshire 5000 Composite Index recorded a paper loss of $1 trillion across the market for the day, a first.

The Dow industrials, which were down 210 points at 10:30 a.m. PDT, nose-dived as traders on Wall Street and investors across the country saw “no” votes piling up on live TV feeds of the House vote.

By 10:42 a.m. PDT, the decline was 292 points. Then the bottom fell out.

Within five minutes, the index was down about 700 points as it became clear the bill was doomed.

“How could this have happened? Is there such a disconnect on Capitol Hill? This becomes a problem because Wall Street is very uncomfortable with uncertainty,” said Gordon Charlop, managing director with Rosenblatt Securities.

“The bailout not going through sends a signal that Congress isn’t willing to do their part,” he added.

While investors didn’t believe the plan was a cure-all, most market watchers believed it was at least a start toward setting the economy right and unlocking credit.

“Clearly something needs to be done, and the market dropping 400 points in 10 minutes is telling you that,” said Chris Johnson, president of Johnson Research Group. “This isn’t a market for the timid.”

Before trading even began came word that Wachovia, one of the biggest banks to struggle from rising mortgage losses, was being rescued in a buyout by Citigroup.

That followed the recent forced sale of Merrill Lynch and the failure of three other huge banking companies — Bear Stearns, Washington Mutual and Lehman Brothers, all felled by bad mortgage investments.

And it raised the question: Which banks are next, and how many? The Federal Deposit Insurance Corp. lists more than 110 banks in trouble in the second quarter, and the number has probably grown.

Wall Street is contending with all of it against the backdrop of a credit market — where bonds and loans are bought and sold — that is barely functioning because of fears that anyone lending money will never be paid back.

Analysts said the government needs to find a way to help restore confidence in the markets.

“It’s probably fair to say that we are not going to see any significant stability in the credit markets or the stock market until we see some sort of rescue package passed,” said Fred Dickson, director of retail research for D.A. Davidson & Co.

The bailout bill failed 228-205 in the House, and Democratic leaders said the House would reconvene Thursday in hopes of a quick vote on a revised bill.

“We need to put something back together that works,” Treasury Secretary Henry Paulson said. “We need it as soon as possible.”

The Dow fell 777.68 points to 10,365.45, its lowest close in nearly three years. The decline surpasses the record for the biggest decline during a trading day — 721.56 at one point on Sept. 17, 2001, when the stock market reopened after 9/11.

Broader stock indicators also plummeted. The Standard & Poor’s 500 index declined 106.85, or nearly 9 percent, to 1,106.42. It was the S&P’s largest-ever point drop and its biggest percentage loss since the week after the October 1987 crash.

The Nasdaq composite index fell 199.61, more than 9 percent, to 1,983.73, its third-worst percentage decline. The Russell 2000 index of smaller companies fell 47.07, or 6.7 percent, to 657.72.

A huge drop in oil prices was another sign of the economic chaos that investors fear. Light, sweet crude settled at 96.37, down $10.52, on the New York Mercantile Exchange as investors feared energy demand would continue to slide amid further economic weakness.

Meanwhile, gold, where investors flock when they need a relatively secure investment, rose $23.20 to $911.70 on the Nymex.

Marc Pado, U.S. market strategist at Cantor Fitzgerald, said investors are worried about the spread of troubles beyond banks in the U.S. to Europe and other markets.

“Things are dying and breaking apart,” he said.