Stocks in the United States plunged on Tuesday as concern about Lehman Brothers' ability to raise new capital revived fears about the broader financial sector.
The S&P 500 index had its worst day in one and a half years.
Shares of Lehman is the No. 4 investment bank in the United States. its shares fell by 45%.
Fears about its survival doused optimism on Monday on a federal takeover of Fannie Mae and Freddie Mac home finance companies on Sunday.
The slide began on news that talks about a possible investment into Lehman from Korea Development Bank had broken down.
It continued after Standard & Poor's rating agency said it could cut the bank's credit rating. Lehman shares ended down 45% at $US7.79.
The Dow Jones industrial average was down 279.11 points, or 2.42 percent, at 11,231.63.
Standard & Poor's 500 Index was down 43.15 points, or 3.4%, at 1,224.64. The Nasdaq Composite Index was down 59.95 points, or 2.64%, at 2,209.81.
Standard & Poor's said the market value of the S&P 500 is down $US3.1 trillion since 9 October, 2007.
About 1.69 billion shares changed hands on the New York Stock Exchange on Tuesday. About 2.58 billion shares were traded on the Nasdaq.?
European shares also lower
European shares closed lower on Tuesday - a day after a federal takeover of the Fannie Mae and Freddie Mac mortgage companies in the United States.
The FTSEurofirst 300 index of leading shares closed down 0.6% at 1,155.66 points, after rising 3.3 percent on Monday. The index is down around 23% to date this year.
Across Europe: Germany's DAX lost 0.5% and France's CAC shed 1.1%.
In Britain, the FTSE 100 was down 30.7 points, or 0.6% at 5,415.6. The index is down over 16% for the year to date.
The Swiss market index closed at 7,189.45 points, up 12.03 or 0.17%.
The BG Group slipped 4.3%. The gas producer has admitted defeat in a$US11 billion hostile bid for Origin Energy in Australia.
Miners, steel producers, oil and energy companies were also down due to weaker metal prices and concerns faded that Hurricane Ike would threaten oil facilities in the Gulf of Mexico.
Copper sank to its lowest in seven and a half months.
NZ market down
The New Zealand share market was flat on Tuesday, up just 2 points to 3376 on turnover of $127 million.
At the close of trade, Telecom was down 8 cents at $3.07, Fletcher Building rose 6c to $7.75 and Contact Enegery was up 29c to $9.
PGG Wrightson slid 5c to $2.50 after obtaining approval of a plan to pay $220 million for a 50% financial stake in meat company Silver Fern Farms on Monday.
The Warehouse was unchanged at $3.23 ahead of the release of its annual results on Friday.
At 6.40am on Wednesday, the New Zealand dollar was trading at US66.33 cents, 83.29 Australian cents, 38.11 pence, 71.95 yen and 0.4741 euro. The Trade Weighted Index was at 64.20.
Australia & Japan
The Australian share market closed more than 1.5% lower.
At 1615 AEST, the S&P/ASX200 was down 87.4 points, or 1.72% to 4980.1, while the All Ordinaries shed 84.4 points, or 1.65% to 5041.9.
At 1615 AEST on the Sydney Futures Exchange, the September share price index contract was 93 points lower at 4990, on a volume of 27,291 contracts.
In Japan: share prices were down 1.77% at the close on Tuesday.
The Tokyo Stock Exchange's Nikkei-225 index fell 223.81 points to close at 12,400.65. The Topix index of all first-section shares closed down 24.82 points or 2.04% to 1,191.59.