NEW YORK: The stock market here suffered the worst one-day loss in seven years as investors, fearing collapse or consolidation of more banks, went on a selling spree late in the session on Monday.
The blue chip Dow Jones industrial average suffered worst loss since Sept 11, 2001 terrorist attacks and plummeted more than 500 points.
Financial markets across the world were rattled by the sale of Merrill Lynch on Sunday and Lehman Brothers Holding declaring bankruptcy on Monday and subsequent decision taken by the government against bailing out the failing financial institutions.
Adding to the turmoil was insurance giant American International Group (AIG) trying to arrange bridge loan of 40 billion dollar to tide over the difficult period and approaching the Federal government and the New York State.
Lehman spent Monday trying to sell its assets before most of its customers walk out on it and was said to be in negotiations with Barclays PLC of Britain. The Wall Street Journal reported quoting people involved in the discussions as saying they are increasingly hopeful a deal would be struck.
Even as the United States treasury officials sought to reassure the markets, analysts said they expect at least some other banks to try to consolidate.
Dow Jones remained in the negative category throughout the day and closed 504.48 points or 4.42 per cent down to 10917.51. The technology-heavy Nasdaq Composite index lost 81.36 points or 3.60 per cent to close at 2,179.91, S&P 500 index, however, fared worst losing 4.7 per cent.
Bank of America, which agreed to buy Merrill Lynch, saw its shares drop 21.3 per cent to 26.55 dollar. The Journal quoted an analyst saying that investors have concern that "it might have bitten more than it could chew". However, Merrill Lynch's shares rose by 0.1 per cent.
Shares of Goldman Sachs and Morgan Stanley also dropped, with analysts saying that investors had concerns as they have similar models as the failed Lehman.
At a briefing in Washington, Treasury Secretary Henry M Paulson Jr agreed that the financial markets were going through tough times but expressed confidence about the soundness and resilience of the system.
He said he was committed to working with regulators and policy makers in the Congress to take additional steps.
On Wall Street, Lehman's share fell 95 per cent to just over 21 cents. Meanwhile, employees of the two failed banks were seen clearing their desks and even saying good byes.
New York Mayor Michael Bloomberg said he did not expect much effect on the city's budget saying that he had taken into consideration this possibility. But New York State Governor David A Peterson was more worried.
He said the State would allow AIG to borrow 20 billion dollar from its subsidiaries.
