* U.S. House rejects $700 bln bank bailout plan
* Yen rises to 4-month high vs U.S. dollar
* Wall St fear gauge climbs to record high
* Asian share markets dive 4-7 percent
By Kevin Plumberg
HONG KONG, Sept 30 (Reuters) - Asian stocks dropped sharply
and the yen hit a 4-month high on Tuesday, after U.S.
lawmakers' shock rejection of a $700 billion effort to end
financial panic triggered the biggest fall in the U.S. S&P 500
since the 1987 stock market crash.
Raw fear gripped markets, with oil prices diving by a tenth
and gold prices rising for a third day, as investors faced hard
realities that big economies could all be headed for a
recession and the crisis of confidence in the bank industry
could persist.
The failure of Washington's biggest and most comprehensive
bid to keep the financial sector shockwaves from tearing up the
real economy accelerated a move by investors from perceived
risky assets to more stable holdings and even plain cash.
"Those voting against it saw, like me, that there's no kind
cure for excessive leverage," said Brett Williams, credit
analyst with BNP Paribas in Hong Kong.
"A modified bill may likely be represented for another
vote, in an effort to save some face, but better to brace for
violent price swings in all asset classes," he said in a note.
Japan's Nikkei share average <> tumbled 4.5 percent to
a 2008 low, and the MSCI index of Asia-Pacific stocks outside
Japan <.MIAPJ0000PUS> fell more than 3 percent, not far off a
26-month low.
Global equities have had a high inverse correlation with
the Chicago Board Options Exchange Volatility index, also known
as the VIX <.VIX>. The last 24 hours have been no exception.
The VIX -- Wall Street's fear gauge -- closed at a record
high overnight, reflecting immense needs to hedge positions in
U.S. equities.
Investors around the world have been scrambling to
eliminate any risk in their portfolios, loading up on
traditional safe harbours in times of extreme volatility like
short-term U.S. government debt and gold.
Gold prices in the spot market edged up 0.25 percent to
$905.50 an ounce <XAU=>, after touching a 2-month high
overnight of $920 an ounce.
Yields on Treasury debt with maturities below 1-year
climbed, with the 1-month bill yield <US1MT=RR> sinking to
0.035 percent. The 3-month bill yield was at 0.7 percent
<US3MT=RR>.
Another asset that has gained favour during times of
widespread uncertainty is the yen.
Though central banks outside the United States have had to
set up special currency swap programs to meet high demand for
U.S. dollar funding, investors have been turning to the yen as
a haven.
"For currencies, the only trade in town with any staying
power is risk aversion and the yen remains the favored pick,"
said Alan Ruskin, chief international strategist with RBS
Greenwich Capital, in a note.
"I think the yen positive story remains clear-cut against
all the major Europeans, and particularly the emerging world."
The dollar dropped to a 4-month low near 103.50 yen before
edging back up to 104.24 yen <JPY=>. The euro was down a modest
0.1 percent at 149.80 yen <JPY=> and off 0.35 percent at
$1.4368 <EUR=>.
The U.S. House of Representatives voted 228-205 against a
compromise bailout plan that would have allowed the Treasury
Department to buy up illiquid assets from struggling banks.
House Republicans, in particular, balked at spending so
much taxpayer money just before the Nov. 4 presidential
election.
Australian Prime Minister Kevin Rudd called for global
pressure to convince U.S. lawmakers to put the world's economy
ahead of the U.S. presidential race and pass the bailout
package.
"These are turbulent times, these are worrying times," Rudd
told a news conference in Canberra.
"The call we need to make is for them to put aside party
politics and pass this package because it is necessary for the
stabilisation of U.S. financial markets and global financial
markets," he said. "All of our interests are at stake here."
Banks continued to be toppled or swallowed up by other
firms, both in the United States and in Europe, as the
financial crisis spread.
In the latest big deal, Citigroup <C.N> agreed to buy
Wachovia Corp's <WB.N> US banking operations for $2.2 billion.
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