LONDON - GLOBAL share prices sank on Monday after Lehman Brothers filed for bankruptcy protection, turning up the heat on financial market stress and prompting a sharp exit from risk across assets.

The dollar also lost traction, with its recent rally abruptly stalled, setting the yen on track for its best daily performance since 2002.

Reflecting a growing sense of panic, futures markets jumped to price in a more than 80 per cent chance of a Federal Reserve interest rate cut to 1.75 per cent at its meeting on Tuesday.

US stock market futures were down between 2.8 and 3.5 per cent, pointing to a sharply lower open, while European stocks shed 3.7 per cent. Among them, Lehman Brothers shares in Frankfurt tanked 80 per cent.

Adding to the mix of ingredients feeding the latest financial storm, American International Group Inc, one of the world's largest insurers, was reported to have asked the US.

Federal Reserve for a $40 billion (S$57.31 billion) bridge loan, and the Fed expanded its liquidity provision facilities.

European stocks followed their Asian counterparts down after share prices in Australia, Singapore and Taiwan all dropped 3 to 4 per cent, while Indian stocks fell 5 per cent.

The FTSEurofirst 300 index of top European shares was down almost 4 percent at 1,116.00 points.

Banks topped the losers list with BNP Paribas, Credit Agricole, Dexia, Fortis and Societe Generale down between 6 and 9 per cent.

'This is a perfect storm in a perfect storm. It's a return to pure capitalism, the survival of the fittest - the government can't and won't bail everybody out,' said Justin Urquhart Stewart, investment director at 7 Investment Management.

Lehman filed for bankruptcy protection after trying to finance too many risky assets with too little capital, making it the largest and highest-profile casualty of the global credit crunch.

Also in the financial sector, Bank of America Corp agreed to buy Merrill Lynch in an all-stock transaction that Bank of America said is worth $50 billion.

Tide turns against risk
Turmoil on Wall Street, just a week after the US government bailed out mortgage giants Fannie Mae and Freddie Mac, sparked a wave of risk aversion through all asset classes.

The dollar tumbled more than 3 per cent at one point versus the yen, setting the Japanese currency on track for its biggest daily gain since early 2002.

Yen gains were later trimmed after China cut its benchmark interest rates and reserve requirements..

Classic financial market safe-haven gold jumped 2 per cent while US Treasury yields, which move in the opposite direction to prices, fell to multi-month lows.

'The next question is are we going to continue seeing a US centric financial sector meltdown or are we going to see something broader, which may highlight additional uncertainty.

Obviously that might act as a catalyst for preventing further dollar falls,' said Mr Jeremy Stretch, strategist at Rabobank.

Growing unease pushed the cost of borrowing overnight dollar funds up. They were indicated at 3 per cent, a full percentage point above the Fed's federal funds overnight target rate.

The price of insurance against default on debt soared, with the investment-grade Markit iTraxx Europe index at 128.5 basis points, 25.5 basis points wider than late on Friday.

The Swiss franc and yen, associated with stability in times of stress, strengthened, especially against the dollar.

The dollar fell roughly 3 per cent to 104.55 yen and was down 1.4 per cent at 1.1148 Swiss francs. The euro rose 0.1 per cent to $1.4240 - with gains capped by ongoing concerns about the euro area economy.

'Increasingly markets may begin to look at who else is exposed to Lehman and that won't be confined to the U.S. ...Also the news flow in Europe hasn't been great either,' says Mr Daragh Maher, deputy head of global FX strategy at Calyon.

Fed, ECB, BoE offer liquidity
The Fed said it would begin accepting equities as collateral for emergency loans for the first time - a step likely to help surviving financial institutions find cash but which may not do much to boost global confidence in the US financial system.

The European Central Bank and Bank of England both announced fine-tuning operations, signalling they were prepared to open the funding taps to try and ease money market tension.

In addition, 10 of the world's biggest banks agreed to establish a $70 billion borrowing facility to bolster liquidity.

US Treasury yields fell sharply. The yield on the policy-sensitive two-year Treasury note briefly hit a five-month low below 1.8 per cent. The 10-year yield was also at the lowest since April, at 3.465 per cent.

While the US financial system loomed large in investors' minds, initial reports that Hurricane Ike had not severely damaged infrastructure in Texas knocked benchmark oil prices fall to a six-month low below $99 a barrel.

Oil dropped 4 per cent to $96.90 a barrel, its lowest mid February. Gold rose 2 percent, last trading at $772.50 an ounce. -- REUTERS