NEW YORK/WASHINGTON (Reuters) - US lawmakers and President George W. Bush eased pressure on financial markets yesterday by starting work to revive a $700 billion bailout plan to stem a credit crisis that has spread beyond Wall Street to claim more European banks.

US stocks roared back — a day after their worst sell-off in 21 years — and the dollar rallied as investors bet Washington would manage to salvage a package to stabilise the financial sector after Monday's shock defeat on Capitol Hill.

The Standard & Poor's 500 index shot up by more than 5 percent, the biggest one-day gain for that measure of the broad market in six years.

The relief rally came as the White House, Treasury Secretary Henry Paulson and the two candidates hoping to succeed Bush as president, Republican John McCain and Democrat Barack Obama, reaffirmed their support for a bailout plan. Congressional leaders started talks to relaunch the package this week.

"There's an overarching belief that at some point this week, whether it's Wednesday or Thursday, we'll get something passed by the House," said Arthur Hogan, chief market analyst at Jefferies & Co in Boston.

Global money markets remained frozen, and London interbank offered rates shot to record levels, indicating banks were not lending to each other. The rate for overnight dollar loans rose to nearly 6.9 percent from just over 2.5 percent on Monday.

The US bailout plan, which would allow the Treasury Department to buy toxic mortgage-related assets from banks, had been the main hope for government action to unlock credit markets and head off a deeper economic downturn in the United States and abroad.

"I assure our citizens and citizens around the world that this is not the end of the legislative process," Bush said.

US regulators were also readying a revision of the "fair value" accounting rule that has led to massive charges on mortgage-related assets, and has been blamed for deepening the credit crisis. The upshot: US banks do not need to mark hard-to-price assets down to firesale prices.

In a separate move intended to shore up consumer and business confidence in banks, the Federal Deposit Insurance Corp (FDIC) is looking to increase the amount of individual deposits it insures.

"All eyes are still on the authorities and their attempts to rescue the financial system," said Vassili Serebriakov, currency strategist at Wells Fargo Bank. "While the Treasury's bailout plan was rejected by lawmakers yesterday, most are still waiting for either a new vote or a 'plan B' type of move."

From Dublin to Moscow, the financial crisis is an ominous presence.

Ireland unveiled a blanket guarantee for savings held by its banks, and for the second time in a month Russia briefly shut down its stock markets.

France, Belgium and Luxembourg poured 6.4 billion euros into Franco-Belgian bank Dexia to avoid defaults on its loans, and France promised new bank measures to help depositors.

Shares of British bank HBOS Plc fell on concerns that Lloyds TSB Group Plc could renegotiate a deal to buy HBOS.

Dutch-Belgian banking and insurance group Fortis was partially nationalised and regional U.S. bank Wachovia sold its banking operations to Citigroup.

The dollar rose against the yen and oil rebounded. European stocks bounced back from the three-year lows hit Monday.

Shares of the US banks seen emerging with a strengthened hand after the crisis, including Citigroup Inc, JPMorgan Chase & Co and Bank of America Corp, shot higher yesterday.

The gains for stocks came against the backdrop of the end of the third quarter, historically a time when corporate profit warnings and fund redemptions spike.

Hedge fund managers are bracing for a wave of investors to cash out as money rushes to safe haven assets.

"I would expect company managements would use this camouflage of the financial crisis as the rationale for marking down expectations," said Ned Riley, chief executive of Riley Asset Management.

Top Senate leaders vowed swift action to pass a rescue plan.

Congress was not in session yesterday because of the Jewish holiday of Rosh Hashanah. The Senate could take up bailout legislation again as early as Wednesday. The House is due to return on Thursday.

A number of the Republicans and Democrats who helped defeat the bailout are up for reelection in November in tight races and had faced widespread voter anger over the bailout.

Many Americans saw the $700 billion fund as an unfair burden on taxpayers and a reward for powerful bankers they blame for creating the housing market bubble.

That put the focus on potential changes to the rescue package that might win over votes from representatives in areas hardest hit by the housing crash such as Florida, California and the Southwest.

"Wall Street as we knew it is already toast — beyond bailing out — but the public still thinks of this legislation as bailing out Wall Street," said Donald Straszheim, vice chairman of Roth Capital Partners in Los Angeles. "Until this perception changes, do-overs to quickly pass similar legislation won't fly."

One of the first signs of how quickly the economic pain is spreading from Wall Street to Main Street will come with today's release of US auto sales for September, when the financial crisis began to topple banks and freeze credit.

Major US auto dealers report difficulty finding financing for car shoppers and tougher terms for funding their own inventories. All major automakers are expected to report sales declines.