U.S. stocks plunged and the Standard & Poor's 500 Index tumbled the most since the 1987 crash after the House of Representatives rejected a $700 billion plan to rescue the financial system.

The Dow Jones Industrial Average slid 778 points for its biggest point drop ever as $1.2 trillion in market value was erased from American equities. The MSCI World Index of 23 developed markets slid 6.9 percent, the most in 21 years.

Negotiations for a $700 billion rescue of the U.S. financial system stalled as House Republicans undercut the Bush administration and left it to congressional leaders to hammer out a compromise that would calm markets.

A day that included an unprecedented meeting of the two main presidential candidates joining the incumbent president, flanked by congressional leaders and Cabinet officers, ended decidedly short of agreement. Lawmakers are set to meet again later this morning.

Treasury Secretary Henry Paulson's $700 billion proposal to stabilize the banking system may push the national debt to the highest level since 1954, threatening an erosion of foreign appetite for U.S. bonds.

The plan, which asks Congress for funds to buy devalued securities from financial institutions, would drive the debt above 70 percent of gross domestic product and the annual budget gap to an all-time high, possibly exceeding $1 trillion next year, economists estimated.

Asian stocks and U.S. futures surged as central banks pumped cash into money markets and the U.S. worked on plans to shore up banks and insurers.

In an extraordinary turn, the Federal Reserve was close to a deal Tuesday night to take a nearly 80 percent stake in the troubled giant insurance company, the American International Group, in exchange for an $85 billion loan, according to people briefed on the negotiations.

All of A.I.G.’s assets would be pledged to secure the loan, these people said, and in return, the Fed would receive warrants that would give it an ownership stake. Stock of existing shareholders would be diluted, but not wiped out.

Bank of America Corp. cemented its status as the largest U.S. consumer bank by agreeing to acquire Merrill Lynch & Co., the world's biggest brokerage firm, for about $50 billion.

The bank will swap 0.8595 shares of its stock for New York- based Merrill Lynch, according to a statement from Bank of America today. The bank pulled out of talks yesterday to acquire Lehman Brothers Holdings Inc., the beleaguered securities firm.

Russia's economy expanded at a slower pace in the second quarter as lower investment and the strong ruble hurt domestic producers.

Gross domestic product grew 7.5 percent, compared with 8.5 percent in the previous three-month period, the Moscow-based Federal Statistics Service reported in an e-mailed statement. The figure is not seasonally adjusted. The median forecast of 10 economists surveyed by Bloomberg was for growth of 7.6 percent. The economy grew 8.1 percent in the second quarter of 2007.

The nation’s economy failed to pick up speed in August and the final days of July, as rising prices and a weak job market prompted consumers to reduce spending and shop at discount stores to try to conserve cash.

Economic activity stayed “weak, soft or subdued” across the country, according to the Federal Reserve Bank’s beige book, a regular snapshot of the economy. The latest edition of the survey, released on Wednesday, signaled that the economy spent the summer in a rut, with consumers feeling little relief from the government’s tax rebates.

Fannie Mae Chief Executive Officer Daniel Mudd replaced three top deputies in an effort to restore investor confidence after record losses and a 90 percent drop in the shares.

Chief Financial Officer Stephen Swad, 47, hired less than two years ago to help the government-chartered company complete an accounting overhaul, will be replaced by Controller David Hisey, 48. Chief Business Officer Robert Levin, 52, and the head of risk management, Enrico Dallavecchia, 46, will also leave, Washington-based Fannie said in a statement yesterday.

Federal Reserve policy makers expect to eventually raise their benchmark interest rate in an effort to slow inflation, but they have not agreed to a timetable for the move, according to minutes of the Fed’s last meeting in early August.