* Oil rallies above $98 a barrel after slide
* Europe rescues more banks; US, European shares rise
* $700 billion bailout rejected, Bush speaks
(Adds Bush comments, updates prices)
By Alex Lawler
LONDON, Sept 30 (Reuters) - Oil was more than $2 firmer near $98 a barrel on Tuesday, after a near 10 percent drop in the previous session, as fears of a major meltdown in financial markets eased.
U.S. crude <CLc1> was up $2.26 at $98.63 a barrel by 1342 GMT, after losing $10.52 on Monday to $96.37 -- the second biggest fall since April 23, 2003. London Brent crude <LCOc1> rose $2.77 to $96.75.
U.S. shares <
> rebounded after the Dow Jones industrial average posted its biggest daily point drop in history on Monday.European stocks <
> firmed initially on Tuesday, suggesting some belief that markets fell too far in Monday's selloff after the U.S. Congress rejected a $700 billion financial sector rescue plan."We've been moving in tandem with how the equity markets have performed," said Rob Laughlin of MF Global. "In terms of the rally today, I think things were overdone last night across many markets, including energy."
"I'm not suggesting the panic is over but I am suggesting the scare tactics in some quarters have proven to be rather overdone."
CRITICAL MOMENT
On Monday, the U.S. House of Representatives voted 228 to 205 against a bailout plan that would have allowed the Treasury to buy up toxic assets from banks. The shock rejection of the plan sent stock markets sliding.
U.S. President George W. Bush said this was not the end of the legislative process on the plan.
"We're at a critical moment for our economy and we need legislation that addresses the troubled assets," he told reporters at the White House.
Concern over the financial sector continued, with Belgian-French financial services group Dexia <DEXI.BR> getting a 6.4 billion euro ($9.18 billion) capital boost from public shareholders.
Ireland offered to guarantee all bank deposits for two years to improve banks' access to funds on international markets, helping sentiment in the equity market.
Oil has fallen sharply from a record high of $147.27 reached in July on signs that high energy prices and the financial crisis have cut into crude demand in the United States and other industrialised nations.
In addition, oil has also been dragged down as investors, who had rushed into commodities earlier this year as a hedge against inflation and the weak dollar, sold crude for safer havens.
Analysts said the spread of credit problems to Europe was also stoking fears that the financial turmoil, which started with risky lending to the overheated U.S. property market, had gone rapidly global.
"Slower international economic growth is bound to dent oil demand," said David Moore, a commodities analyst at the Commonwealth Bank of Australia. (Additional reporting by Maryelle Demongeot in Singapore and Fayen Wong in Perth; editing by James Jukwey)