Sept. 30 (Bloomberg) -- Asian stocks dropped, extending the worst global sell-off in 21 years, after the rejection of a $700 billion plan to rescue the financial system by U.S. lawmakers exacerbated concern more banks will fail.

Mitsubishi UFJ Financial Group Inc. and Australia & New Zealand Banking Group Ltd. slumped more than 5 percent after Wachovia Corp. was sold to Citigroup Inc. as its shares collapsed under the weight of overdue mortgages. BHP Billiton Ltd. and SK Energy Co. declined after oil fell the most in almost seven years on speculation the global economy will slide into recession. U.S. stocks yesterday tumbled the most since the 1987 crash.

``There is a massive crisis of confidence,'' said Khiem Do, who helps oversee $9 billion of Asian equities at Baring Asset Management (Asia) Ltd. ``There is definitely further downside.''

The MSCI Asia Pacific Index retreated 3.3 percent to 107.66 as of 9:40 a.m. in Tokyo. The yield on U.S. Treasury 10-year notes rose 3 basis points to 3.59 percent as Treasury Secretary Henry Paulson said he'll work with Congress to salvage the rescue plan, while the dollar fell for a third day against the yen.

The MSCI Asian index has slumped 32 percent this year as credit turmoil caused the world's financial institutions to report more than $590 billion in losses and writedowns.

Japan's Nikkei 225 Stock Average lost 4.7 percent to 11,187.74. Benchmark indexes in Australia and South Korea declined more than 3 percent.

Global Rout

The Standard & Poor's 500 Index tumbled 8.8 percent yesterday, while the MSCI World Index of 23 developed markets slid 6.9 percent, the biggest loss in 21 years. S&P 500 futures added 0.5 percent in after-hours trading.

The U.S. House of Representatives yesterday voted down the financial-rescue proposal that President George W. Bush said is needed to prevent the world's largest economy from slipping into a recession. The defeat of the legislation set off a scramble among the plan's backers for additional support before another vote, which likely won't come until later in the week.

Mitsubishi UFJ, Japan's largest bank, retreated 6.6 percent to 875 yen. ANZ, Australia's fourth-largest bank, lost 5.6 percent to A$17.74. Woori Finance Holdings Co., with the biggest exposure to U.S. mortgage-related investments among South Korean banks, dropped 6.8 percent to 11,050 won.

``Nobody anticipated this in the market,'' said Mitsushige Akino, who oversees about $468 million at Ichiyoshi Investment Management Co. in Tokyo. ``The global financial market is nearing the brink of collapse, and the only real choice investors have right now is to sell stocks and hold cash.''

`Dysfunctional'

Wachovia sank 82 percent yesterday in U.S. trading after the Federal Deposit Insurance Corp. helped arrange the takeover of its banking operations by Citigroup. The biggest U.S. bank by assets will absorb as much as $42 billion of losses on Wachovia's $312 billion pool of loans, the FDIC said yesterday.

``Volatility in the market has been notched up to a new high,'' said Prasad Patkar, who helps manage $1.8 billion at Platypus Asset Management in Sydney. ``Credit markets are dysfunctional at the moment and if they aren't normalized quickly we have a serious problem.''

BHP, the world's largest mining company, slipped 7.4 percent to A$31.72. SK Energy, South Korea's biggest oil refiner, fell 5.1 percent to 87,300 won.

Crude oil fell 9.8 percent yesterday to $96.37 a barrel in New York, helping send the Reuters/Jefferies CRB Index of 19 commodities to the biggest drop since at least 1956.

`Fear and Uncertainty'

``You're seeing a general flight from commodity players around the world,'' said Sean Fenton, who manages the equivalent of $540 million at Tribeca Investment Partners in Sydney. ``There's a lot of fear and uncertainty in the market, not helped by the fact that we're seeing accelerated bank failures.''

Australia's currency slid the most in three weeks versus the yen as commodities dropped and the stocks rout curbed investor appetite for buying the nation's higher yielding assets with cheaper funds borrowed from Japan.

The Australian dollar fell 2.1 percent to 79.76 U.S. cents while New Zealand's dollar slid 1.2 percent.

``Traders are sure to bail out of higher-yielding currencies and put their money back into the yen,'' said Mitsuru Sahara, senior currency sales manager at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan's biggest publicly traded lender.

To contact the reporter for this story: Kyung Bok Cho in Seoul at kcho7@bloomberg.net; Shani Raja in Sydney at sraja4@bloomberg.net.

Last Updated: September 29, 2008 21:09 EDT