One of Washington’s senior senators urged the US Government last night to block the $700 billion (£378 billion) rescue package for the banks, which would be the biggest bailout since the Great Depression.

Senator Richard Shelby, the leading Republican on the Senate Committee on Banking, Housing and Urban Affairs, said in a statement that the Treasury’s proposal was “neither workable nor comprehensive”.

Fears that the intense political haggling will delay a vote and put a stop to the entire bailout triggered renewed sell-offs across equity and currency markets on both sides of the Atlantic yesterday.

In New York, the Dow Jones industrial average plunged 372.80 points to 11,015.70. In London, the FTSE 100 index ended off 75 points at 5,623.3. The dollar plunged 2 per cent against the euro to three-week lows.

In a statement, the senator said: “I am concerned that the Treasury’s proposal is neither workable nor comprehensive, despite its enormous price tag. In my judgment, it would be foolish to waste massive sums of taxpayer funds testing an idea that has been hastily crafted, and may actually cause the Government to revert to an inadequate strategy of ad hoc bailouts. Given that markets have recently taken confidence in the prospect of government involvement, I believe Congress must immediately undertake a comprehensive, public examination of the problem and alternative solutions rather than swiftly pass the current plan with minimal changes or discussion. We owe the American taxpayer no less.”

Mr Shelby’s position represents a severe blow to Henry Paulson, the US Treasury Secretary and architect of the rescue, who had hoped the required legislation would be passed on Friday, but has been overwhelmed by lawmakers in Washington who are bickering among themselves to have their measures included in the Bill.

Mr Paulson believes that without the speedy rescue package, the American banking system faces meltdown. In a worrying development, other struggling American industries outside Wall Street began to ask for similar assistance. Measures adopted at the end of last week to stem banking share price falls by banning short-selling temporarily, were requested by car and real estate companies.

Barney Frank, a Democrat and chairman of the House Financial Services Committee, yesterday managed to secure that the Government will have the authority to seize stakes in banks seeking to benefit from the bailout. Mr Frank also gave warning that any agreement on the legislation could drag on into next week.

Mr Frank also urged Mr Paulson to include in the bailout Bill the right for Washington to limit executive pay awarded to banks that benefit from the rescue package.

Other Democrats want bankruptcy judges to be able to force mortgage lenders to lower the interest charged on a home loan, to help householders to keep their property.

Republicans, scared by plans effectively to nationalise part of Wall Street, are demanding an overhaul of the regime regulating financial services in America and also checks on the way that the Treasury manages the colossal bailout fund.

Mr Paulson wants to create a federal fund into which troubled banks can sell distressed assets at a discount, to be funded entirely by the American taxpayer. The former chief executive of Goldman Sachs hopes that once the banks have rid themselves of such toxic securities, they will start lending to one another again and avert a collapse of the US financial system.

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