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The US auto bailout bill has been rejected by the Senate after Democrats failed to convince enough Republicans to assist the industry.

The Democrat-backed proposal involved granting a $14 billion (£9.4 billion) bridging loan to the big three motor manufacturers – Ford, General Motors (GM) and Chrysler – and appointing a 'car tsar' to oversee how the taxpayers' money was spent.

All three companies have been in Washington to beg the government for financial aid as the economic slowdown and the credit crunch threatens to bankrupt the industry, with the loss of millions of American jobs.

The White House and Democratic supporters of the bill were successful in steering it through the House of Representatives on Wednesday but failed to convince enough Republicans in the Senate, where Democrats have a majority of just one.

Without immediate aid, GM has said it does not have enough cash to last into the new year.

It is thought only Ford currently has enough liquidity to survive into 2009.

Senate majority leader, Harry Reid, expressed his disappointment at the vote.

"I dread looking at Wall Street tomorrow. It's not going to be a pleasant sight," he said.

"Millions of Americans, not only the auto workers but people who sell cars, car dealerships, people who work on cars are going to be directly impacted and affected."

Markets around the world plunged on the news as investors fear the collapse of one of America's automakers will be massively disruptive to the economy.

Japan's Nikkei 225 fell 5.56 per cent on closing and Hong Kong's Hang Seng was down 5.48 per cent. This morning, the UK's FTSE 100 dropped three per cent in early trading and had shed 127 points by 08:35 GMT.