A system and method for fault containment and error handling within a domain in a partitioned computer system includes a system manager having read and write access to a resource definition table. The system manager is adapted to quiesce the system when failure occurs within a domain, identify an allocated resource associated with the failed domain, identify a non-failed domain, and exit the quiesce mode for the non-failed domain, thereby containing a failure within the failed domain. The system manager further handles an error within the failed domain by deallocating a resource allocated to the failed domain so that the resource becomes available to non-failed domains.