Washington - A massive government rescue of the US financial system failed in Congress amid both doubts that Wall Street's dire straits would affect the lives of ordinary Americans, and outrage in any case that taxpayers should bail out corporate titans.

Government officials and congressional leaders from both parties warned that, however distasteful, it would take an unprecedented government intervention in the financial sector to keep the US economy afloat.

At stake is the availability of loans for everything from homes to cars to university educations, which leaders warned could dry up completely if banks were not provided with the money to continue providing credit to the average consumer.

The argument has inflamed US voters, who flooded their congressional representatives with phone calls and emails opposing a 700-billion-dollar bailout of greedy Wall Street investors.

Only five weeks before US presidential and congressional elections, the voter dissension was too much for many legislators to ignore.

Larry Lindsey, a former Federal Reserve governor, said that congressional leaders had failed to heed the concerns of backbenchers afraid of losing their seats in Congress. "When you talk to rank-and- file members, it's easy to understand why (the bill) went down," he told financial news channel CNBC.

A survey last week by the respected Gallup polling organization found that 78 per cent of respondents wanted Congress to pass some kind of plan, but only 22 per cent favoured a plan similar to what was eventually defeated on Monday.

The House of Representatives voted 228-205 Monday against the rescue package, which would have seen the government buying up mortgage-backed securities - loans made to individual homeowners, bundled and sold to investors
- that have been at the heart of the credit crisis for more than a year.

Congressional leaders on both sides of the aisle had urged their members to swallow the bitter pill and vote for the measure after nine days of tough negotiations. Provisions were added that would require most of the 700-billion-dollar investment to be eventually recovered from Wall Street.

The bill was characterized both as something nobody wanted and yet the only means to stave off a collapse of the US economy. US stocks had one of their worst-ever trading sessions on Monday, amid widespread fears of more bank failures to come.

"As angry as (constituents) are right now, they're gonna get a lot angrier" if Congress fails to act, said Christopher Dodd, Democratic chairman of the Senate Banking Committee and one of the key negotiators of the bill.

Motivated perhaps by a mix of free-market idealism and populist politics, the House revolt was led by minority Republicans, though large numbers of legislators from both parties disagreed with the bailout.

Some argued that government intervention was inappropriate in a free market designed to let investors take the fall for unnecessary risks. Others doubted whether the plan would really be effective - 700 billion dollars could only be the beginning for a government already steeped in debt.

"Those who believe they can control the market's invisible hand will eventually be slayed by it," Congressman Jeff Flake, a Republican from Arizona, said during a four-hour floor debate prior to the vote.

Others argued that social fairness required that the legislation offer more help to homeowners struggling in danger of default, including better bankruptcy protections for mortgage-holders. Plunging home prices have contributed to a record number of foreclosures over the last year.

At the heart of the matter were questions over whether the bailout would really be advantageous to ordinary Americans. In other words: if Congress fails to act, will the pain felt on Wall Street really trickle down to Main Street?

"This vote today, in my mind, was a vote between bankrupting my daughter and our kids and bankrupting a few Wall Street banks that made bad decisions," Texas Republican John Culberson told CNBC.

As legislators headed back to the negotiating table, it was unclear just what new provisions could change enough minds in Congress. Despite the sharp ideological contrasts, politicians held out hope that they could still scrape together the 12 extra votes needed for passage.

"We've got too much work to do, and this is much too important to simply let fail," said Treasury Secretary Henry Paulson, the original architect of the bill. (dpa)