House Speaker Nancy Pelosi (C) holds aloft the $700 billion financial bailout bill after she signed it, in an attempt to provide relief for the current financial and banking crisis, at the US Capitol in Washington, October 3, 2008.

The U.S. government enacted a landmark $700 billion bank bailout Friday, but investors questioned whether it could contain a panic that began on Wall Street and spread to become a global financial crisis.

The U.S. House of Representatives approved the rescue plan by a vote of 263-171 on Friday. That sent the measure to President George W. Bush, who quickly signed it into law, concluding two weeks of high-stakes haggling over the plan that had roiled and captivated global markets.

Markets pivoted on passage of the U.S. bailout, as investors’ attention turned to signs of a gathering recession.

Stocks, which had been higher before the vote, dropped, with the S&P 500 index closing at its lowest level in almost four years. The dollar was also in retreat.

“This probably comes a bit too late. If this had been done earlier, it probably would have had a much bigger impact in restoring confidence,” said Anna Piretti, economist at BNP Paribas in New York.

U.S. Treasury Secretary Henry Paulson, who had been the administration’s chief lobbyist for the plan, said he would move quickly to buy up distressed assets from banks.

“We have shown the world that the United States of America will stabilize our financial markets and maintain a leading role in the global economy,” Bush said in a short statement delivered before cameras outside the White House.

Analysts cautioned it was still unclear whether the U.S. plan would work as advertised.

“There are more questions than answers out there still,” said David Kelly, chief market strategist of JPMorgan Asset Management. “Even if the banks do participate, how willing will they be to make new loans into the economy if they can get rid of the bad ones?”

The U.S. government has run up a bill of $1 trillion in recent weeks as it rushed to stabilize its banks, including the seizures of Fannie Mae and Freddie Mac. That cost is equal to over 7 percent of the world’s largest economy.

Earlier on Friday, the hobbled financial sector was bolstered as Wells Fargo & Co stepped in to buy Wachovia Corp in a deal that would take the place of a shotgun merger with Citigroup Inc brokered by U.S. banking regulators.

But in signs of the spreading crisis, California said it was running out of money, France said the world stood on the “edge of the abyss” and European leaders divided over their response to the banking sector’s difficulties.

HOUSE FALLS INTO PLACE

The House had shocked world markets on Monday by rejecting a previous draft. With elections a month away, lawmakers from both parties were wary of voter backlash in asking taxpayers to pay for Wall Street’s mistakes.

Earlier on Friday, the United States reported its biggest monthly job loss in 5-1/2 years, more evidence of an approaching recession. Data showed the U.S. services sector holding up.

Speaker after speaker from both parties on the House floor said rejecting the bailout a second time could have devastating consequences for an already slowing U.S. economy.

“While the focus has been on the Dow Jones and Wall Street, we are addressing the real pain felt by Mr. and Mrs. Jones on Main Street,” said House Speaker Nancy Pelosi, a California Democrat.

The credit crisis and its threat to the economy have dominated the U.S. presidential election. Both Republican John McCain and Democrat Barack Obama supported the bailout and welcomed its passage.

“I’m glad to see we’ve finally got this thing dealt with,” Obama said while campaigning in Pennsylvania. “The No. 1 thing is that the administration uses this authority wisely.”

McCain said it was “an outrage” that the crisis had reached the point of demanding an emergency response from lawmakers.

“Our economy is still hurting, hurting badly,” he said in Arizona. “Further action is needed and it shouldn’t take a crisis to get this country to act.”

Meanwhile, the nation’s most populous state warned it could need to fall back federal loans because it has been shut out of credit markets. California, with an economy on par with Spain’s, cautioned it could run out of cash by the end of the month, bringing services to a grinding halt.

A collapse in the U.S. housing market and resulting bad mortgages have shattered confidence in the financial sector, with banks across the United States and Europe needing support from governments or outside investors this week.

Interbank lending and credit to businesses and private individuals has all but seized up. Central banks have injected billions of dollars to maintain some flow of funds.

‘ON THE EDGE OF THE ABYSS’

French Prime Minister Francois Fillon, whose country is hosting an emergency summit with Italian, British and German leaders on Saturday, said only collective action could solve the financial crisis. He said he would not rule out any solution to stop any bank failing.

“The world is on the edge of the abyss because of an irresponsible system,” Fillon said, alluding to widespread anger over past lax regulation and excessive lending.

Fillon said President Nicolas Sarkozy would propose at the emergency meeting measures to unfreeze credit and coordinate economic and monetary strategies.

In Britain, Prime Minister Gordon Brown shook up his cabinet and authorities took three separate steps to try to shore up the financial system.

Bad news mounted in the European financial sector.

Dutch-Belgian banking and insurance giant Fortis was broken up on national lines, with the Dutch government taking over its operations in the Netherlands, after an earlier rescue effort and asset sale failed.

In Switzerland, UBS AG, hardest hit among European banks by its exposure to subprime holdings, said it would cut 2,000 investment banking jobs.

Divisions have emerged within Europe over the past week, with Ireland offering guarantees on bank deposits, prompting a flight of capital from British lenders to Irish banks.

EU partners said Ireland’s move could break competition rules and threatened the unity necessary to ensure an ordered approach to turmoil ahead.

Source: Reuters