By Joseph J. Schatz and Benton Ives, CQ Staff

After the spectacular failure Monday of a delicately negotiated compromise to bail out the financial sector, the response in the markets in coming days may determine the next move for a Congress gripped by uncertainty.

The precipitous stock market drop after the House defeat of a $700 billion plan to take troubled assets off the books of financial institutions was an eye-catching event for most lawmakers, including those who railed against the legislation (HR 3997).

“Clearly there is no doubt that there is a crisis on Wall Street. Now that crisis is . . . going to Main Street. You can look at what is happening on the Dow,” said Rep. Jeb Hensarling , R-Texas, chairman of the Republican Study Committee (RSC), an influential bloc that opposed the bill. “But Congress shouldn’t act on a piece of legislation . . . based upon what the Dow did in one day.”

So far, congressional leaders have no clear way forward as they head back to the drawing board.

“We are ready to continue to work on this,” said House Financial Services Chairman Barney Frank , D-Mass., a key architect of the legislation. “As a practical matter, the initiative will probably come from the administration.”

Chris Van Hollen of Maryland, chairman of the Democratic Congressional Campaign Committee, said that party leaders were considering trying to build momentum for the package by letting the Senate, where bipartisan support for the plan is stronger, vote on its first. “That could change the dynamic,” he said.

But Senate Banking Chairman Christopher J. Dodd , D-Conn., who helped put together the plan, ruled that out. “I think our job in the Senate now is to let the House resolve its difficulties and then let us know what the resolution is and whether or not we can live with it,” he said.

Negotiators could tweak the existing proposal, in hopes of winning more Republican votes. “Well, there are issues out there that are appealing to Republicans,” GOP Conference Chairman Adam H. Putnam , R-Fla., said after the vote. “Doubling FDIC insurance, things like [accounting] changes, I think, are appealing to Republicans without being revolting to Democrats.”

The RSC, a group of fiscally conservative, often business-friendly House Republicans, wants the core of the bill to create a government insurance plan for shaky assets, with premiums paid by financial institutions — one of several options for the Treasury Secretary in the current bill. They also proposed new Securities and Exchange Commission regulations prohibiting “mark to market” accounting, which requires companies to value assets based on their current potential sale price.

Members in Tough Races Reject Bailout Bill: Click here to view the chart

“House conservatives have concerns. Having said that we know we’re in the minority, we want to negotiate in good faith,” Hensarling said. “We come here today willing to swallow hard, but we can’t swallow everything.”

However Congress proceeds, strong signals from the market likely will dictate their behavior. Putnam said members watched the plummeting market numbers on a TV in the cloakroom before and during the vote. “We’re encouraging members to understand the consequences of doing nothing,” he said.

Shortly after 2 p.m. Monday, the House voted, 205-228, to defeat the bailout package despite the endorsement of both parties’ leaders and heavy lobbying from the White House. The Dow Jones industrial average plunged and closed down nearly 780 points, its largest one-day fall ever. Concerns about a worsening credit situation, which could impact millions of American businesses and households, grew.