WASHINGTON - The global financial system plunged into turmoil Monday as investment giant Lehman Brothers went bankrupt, sparking fears of contagion that could drag down other firms and send shocks through the world economy.
Stocks markets tumbled worldwide on fears of more dominoes to fall, with concerns centered on American International Group, one of the world's biggest insurers, whose shares were in a death spiral.
Weekend crisis talks in New York led by the US Federal Reserve and Treasury officials failed to save Lehman, but rival Merrill Lynch got a lifeline with a 50 billion-dollar takeover deal from Bank of America.
The massive Lehman bankruptcy filing in US federal court in New York listed 639 billion dollars in assets at 613 billion in debts.
The news of Lehman's collapse prompted a bloodbath in global financial markets as traders flocked to safer Treasury bonds on fears of more dominoes falling in the banking system.
Some analysts said the Federal Reserve, which took a series of steps Sunday and Monday to boost liquidity available to the financial system may need to cut interest rates at its Tuesday policy meeting.
"The sudden bankruptcy of Lehman Brothers over the weekend has led to another dangerous escalation of the crisis in the US financial markets," said Brian Bethune, economist at Global Insight.
"The economy is very weak, the recession wolves are pounding down the door and the financial system faces new deflationary threats from the bankruptcy of Lehman Brothers. This is an emergency situation and an aggressive response from the Fed is needed."
US President George W. Bush said Monday he was working to "minimize the impact" of "painful" economic turmoil, but vouched for the long-term health of battered US capital markets.
Treasury Secretary Henry Paulson said he would work with US lawmakers and financial authorities overseas to ensure "the stability and orderliness" of crisis-hit US capital markets.
In New York, Lehman shares, delisted from the New York Stock Exchange, plunged 94 percent to 21 cents.
American International Group, one of the world's biggest insurance companies, slid 60.8 percent on fears it may too face a death spiral from a cash crunch and possible credit downgrade.
In Europe, the banks bore the brunt of the losses as the Lehman Brothers bankruptcy undercut any notion of business as usual, dealers said.
In London, HBOS plunged 36 percent at one stage but managed to finish with a loss of 17.55 percent, reflecting concerns about a bank that had to raise fresh cash earlier this year after massive losses on its US subprime exposure.
Royal Bank of Scotland, similarly in the firing line, lost 10 percent and Barclays was down 9.84 percent.
The weight of news showing that the subprime aftershocks were far from over caused global stock markets to fall sharply and analysts to warn that the financial system in advanced countries was on a knife edge.
The US Federal Reserve bank provided funds to banks on easy terms, and the European Central Bank and Bank of England injected tens of billions of dollars to avert a domino effect, known as systemic failure.
But stock markets in the United States, Europe and Asia fell by nearly four percent.
Another distress signal from the US financial system was a report that insurance giant AIG was looking for a huge emergency loan of 40 billion dollars.
And US banks dominated an international group of 10 banks announcing a 70-billion-dollar global fund to help finance companies in crisis.
The price of oil also dropped sharply below 93 dollars a barrel on prospects that this new chapter in the home-loan crisis would slow leading economies further and cut demand for oil.
The ECB and Bank of England tried to reassure markets by injecting funds, 30 billion euros (43 billion dollars) from the ECB and 5.0 billion pounds (9.0 billion dollars, 6.3 billion euros) from the British bank, into their banking systems.
The European Commission expressed confidence "of good coordination, as well as a solution" from central banks and other agencies.
"You've probably seen more in one day of financial history than we've seen since the great crash of 1929," Macquarie Private Wealth associate director Marcus Droga said.
But Nobel Prize-winning economist Joseph Stiglitz said the crisis now gripping financial markets should be less serious than that caused by the 1929 stock market crash in the United States, which led to the Great Depression.
"The general view is that we have instruments, monetary and fiscal policy, that we know how to prevent another Great Depression," he told AFP.
New York Mayor Michael Bloomberg said markets had still not hit bottom as global stocks plunged following the collapse of investment bank Lehman Brothers, but predicted that Wall Street should cope.
"The week ahead is likely to be a difficult one on Wall Street. Other companies are facing serious questions about their future and the uncertainty of the markets means, in all likelihood, that we still have not hit the bottom of the cycle," Bloomberg told journalists.