Asian dealing rooms opened on Tuesday with a massive deluge of selling as investor sentiment across the region reeled from Washington's stunning rejection of the $700 billion bailout plan for Wall Street.

With the benchmark Japanese, Australian and New Zealand stock indexes plunging nearly 5 per cent from the opening bell, traders in Hong Kong, which opened more than 5.5 per cent lower, braced for similar carnage as dealing began later in the morning.

It was worse in Taipei, where the first half hour of trading saw the main index pummelled by more than 6.3 per cent. Tokyo shares, breaking through levels of support like a knife through butter, struck a year's low as uncertainty reigned.

Jessica Khine, a broker at Mitsubishi UFJ in Singapore, described the rejection of the bailout bill as the "worst possible outcome" and said that, while some hope may lie in a package being cobbled together in its aftermath, the rejection was "undoubtedly a catastrophe of considerable proportions."

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Money market traders around the region said that the sense of "total market dysfunction" had grown following the failed passage of the bailout package.

Dealers at Royal Bank of Scotland reported a disturbing surge in overnight dollar rates across Asia, which reportedly leapt to between 6 and 8 per cent from the 1.5 to 3.0 per cent range that prevailed on Monday.

The Hang Seng index in Hong Kong opened with an immediate plunge of 5.6 per cent as the spectre of bank failures and bailouts across Europe triggered a wave of concern about the stability of their Asian counterparts.

Those worries have already hit the streets: Hong Kong last week endured its first run on a bank since the 1997 Asian financial crisis as depositors mobbed branches of Bank of East Asia. Mainland Chinese shares are expected to take a heavy beating later today.

In Seoul, stocks took a pounding with the main Kospi index down more than 3.5 per cent as a flurry of "sell" orders raced across trading screens.

The early devastation in Japan was particularly spectacular — many stocks were expected to tumble by their daily trading limits, although some of the hardest-hit shares found limited support just ahead of the lunch break.

Within the first 20 minutes of trading and with the benchmark Nikkei index almost immediately 580 points lower, some stocks — particularly banks — did not move as the markets struggled to process what dealers described as a nearly unprecedented build-up of pre-open "sell" orders with no buyers to match them.

As a sign of the level of panic in official circles, the Bank of Japan injected a further 2 trillion yen (£10.6 billion) into the Tokyo money market in an increasingly desperate effort to instil a sense of calm.

Outside the stock exchange, the sense of panic crashed through other markets with the same force.

Copper fell to a nine-month low. On the Tokyo Commodity Exchange, the benchmark rubber contract plunged by its daily trading limit and was immediately suspended as speculators guessed that global industrial demand for tyres will contract dramatically.

Word that Toyota will cut back on production in China served as a signal to many investors that the US meltdown is now "unarguably global". Platinum, a key ingredient of catalytic converters for new cars, fell 3 per cent as the outlook for worldwide auto sales dimmed.

Corn and wheat fell and soybeans tumbled to a 10-month low in a reversal of the sort of exponential food price inflation that sparked worldwide panic earlier this year.

Despite the relative stability and capital adequacy of Japan's banking system, investors are increasingly taking the view that the world's second biggest economy — along with the rest of Asia — does not have what it takes to survive if the US financial system continues its "death spiral" unaided by a government bailout.

Those fears are especially acute in South Korea, where reports suggest that the Government is planning to ban all short-selling until the end of the year and where the won today tumbled to a five-and-a-half year low against the US dollar.

The top financial regulator in Hong Kong joined anti-short-selling rhetoric, declaring that it would not tolerate abuse of the trade, and giving warning that it might impose market-wide restraints on the practice.

His counterpart in Taiwan threatened to place tighter limits on short-selling as part of what appear to be increasingly desperate efforts to bring some stability back to markets.

Traders at Nomura said that the sense of doom was significantly enhanced by poor economic data released before the markets opened. Japanese industrial production and household spending both slid badly, dashing hopes that Asia's biggest economy might have earned some immunity to the global meltdown.

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