Most Asian stock markets fell Tuesday in stunned dismay over U.S. lawmakers' rejection of a $700 billion bank rescue plan aimed at stabilizing the U.S. financial system. European markets opened mixed.

Markets across Asia opened sharply lower amid fears that the setback could lead to a broader global financial crisis. But as trading progressed, many indices erased losses and Hong Kong's market staged a dramatic turnaround to close slightly higher as investors scooped up beaten-down shares.

Japan's benchmark Nikkei stock 225 index slumped 4.12 percent to close at 11,259.86 — the lowest level since June 9, 2005. In Australia, the S&P/ASX-200 index fell 4.3 percent after falling as much as 5.3 percent.

The bailout rejection dealt a "severe blow to Asia markets right after the Lehman shock," said Mitsushige Akino, fund manager at Ichiyoshi Investment Management in Tokyo, referring to the collapse earlier this month of the U.S. investment bank.

Even if it does passes, the bailout is seen as the beginnning of long, arduous process at cleaning up the bad debt mess.

"Many investors grew even more cautious because of the latest development over the (bailout) bill, and they only see passage of the bill as a minor improvement to the crisis," Akino said.

A couple markets bounced back in signs that some investors thought shares were oversold. Hong Kong's Hang Seng index gained 0.76 percent to close at 18,016.21 after earlier plunging more than 5 percent. India's Sensex was up 2.4 percent in afternoon trading.

European markets were modestly mixed in early trading Tuesday, with Britain's FTSE 100 little changed at 4,817.79 and France's CAC up 0.3 percent.

In Russia, regulators halted trading on its two major stock exchanges Tuesday after markets there opened significantly lower.

Investors were stunned by the U.S. House of Representatives' rejection Monday of a $700 billion emergency bailout package that would have allowed the government to buy bad mortgages and other sour assets held by troubled banks and other financial institutions.

With elections in November, many lawmakers were unwilling to take the political risk of supporting a measure that many American voters see as an undeserved bailout for rich, reckless investment bankers.

"This is a bad development," Australian Prime Minister Kevin Rudd told reporters in Australia's capital, Canberra. He urged U.S. lawmakers to urgently return to negotiations to come up with a deal that will prevent further infection of world markets.

In New York, the Dow Jones industrial average plunged 777 points, its biggest ever single-day drop, or nearly 7 percent, to 10,365.45, its lowest close in nearly three years.

U.S. stock index futures were higher, suggesting Wall Street would recover when it opens Tuesday.

Japanese Prime Minister Taro Aso urged the country's financial officials to closely monitor the situation and take appropriate measures to protect the world's No. 2 economy, according to Kyodo News agency.

"We have to respond appropriately in order not to affect the Japanese economy and to prevent the financial system from falling apart," Aso was quoted as saying.

Japan's banks have relatively little exposure to the bad mortgages at the core of the global credit crisis, but investors are worried that a slowdown in the U.S. and global economy will hurt demand for exports.

The Bank of Japan on Tuesday morning pumped another 3 trillion yen ($28.7 billion) into money markets, as part of efforts by central banks worldwide to boost liquidity and bolster interbank lending. That brings the BOJ's total injection to 21 trillion yen ($200.6 billion) since the collapse of Lehman Brothers Holdings Inc. earlier this month.

The chaos sapped the dollar overnight. The greenback was trading at 104.32 yen Tuesday afternoon in Asia from above 106 yen a day earlier, adding further pressure on major exporters.

Markets in mainland China are closed this week for National Day celebrations, and Hong Kong will be closed Wednesday.