That came despite urgent pleas from President Bush and congressional leaders from both parties.
When the vote was tallied, too few members of the House were apparently willing to back the unpopular bill just five weeks before Election Day. Both Democrats and Republicans voted against the measure.
Stocks plummeted on Wall Street even before the 228-205 vote was taken. Wall Street closed with its biggest point drop in history, down nearly 700 points.
The White House says President Bush is "very disappointed" with the vote. A spokesman says the president will meet with advisers to decide what next steps should be taken.
That's also the question for Congressional leaders. Congress has been trying to adjourn so that its members can go out and campaign.