TOKYO - Asian stock markets plummeted Tuesday as the collapse of Lehman Brothers and takeover of Merrill Lynch spurred fears of an imminent global financial crisis.
European markets extended losses in early trading after falling sharply Monday.
Tokyo's Nikkei 225 index sank nearly 5 percent to 11,609.72, its lowest close since July 2005, while Hong Kong's blue-chip Hang Seng Index shed 5.4 percent to its lowest point in nearly two years. Both markets — Asia's two biggest — had been closed for holidays on Monday, when news first broke about the turmoil on Wall Street that has dramatically changed its landscape.
"Today was a bloodbath," said Alex Tang, head of research at Core Pacific-Yamaichi, who noted that trading volume was its highest in months. "This was panic selling ... They are dumping shares, they just want to liquidate their positions."
South Korea's main index slumped 6.1 percent, Taiwan's benchmark was off 4.9 percent, and China's Shanghai index dropped 4.5 percent to a nearly two-year low. But markets in India and Indonesia managed to eke out gains.
To ensure liquidity, Japan's central bank on Tuesday injected of 2.5 trillion yen (US$24 billion) into money markets and issued a statement vowing to take measures to maintain stability in the country's financial markets.
The dollar also took a hard hit, sinking to 103.83 yen Tuesday afternoon in Asia from mid-107 yen levels before the weekend.
In Europe, Britain's FTSE 100 was down 1.5 percent in morning trading and France's CAC-40 slid 1.4 percent.
The Japanese unit of Lehman Brothers Holdings Inc. on Tuesday sought bankruptcy protection at a Tokyo court after the 158-year-old firm filed for Chapter 11 bankruptcy in New York the previous day.
Desapite a flurry of last-minute negoatiations over the weekend, the storied New York investment bank was unable to find an investment parter to throw it a lifeline amid US$60 billion in soured real-estate holdings.
Investors were further shaken by equally stunning news that Merrill Lynch, one of the world's most famous brokerages, sought to avoid a similar fate with a $50 billion transaction to become part of Bank of America Corp.
Indeed, the crisis appeared to be far from over. American Insurance Group, the world's largest insurer, was fighting for its survival after downgrades from major credit rating firms, adding pressure as AIG seeks billions of dollars to strengthen its balance sheet.
On Wall Street Monday, the Dow Jones industrial average fell more than 500 points, or 4.4 percent, to 10,917.51 — its worst point drop since after the September 11, 2001, terror attacks.
U.S. stock futures were down modestly, suggesting Wall Street could fall further Tuesday.
The Tokyo Stock Exchange halted securities and derivatives trading by Lehman Brothers a day after Japan's financial watchdog ordered its local unit to suspend operations.
Regulators in Hong Kong also announced they were restricting Lehman's trading activities, allowing the firm to deliver securities to clients for any trades in the last two days and to settle any outstanding futures positions with clients by day's end.
South Korea's financial regulator suspended some operations of two local units of Lehman Brothers.
Financial issues faced intense selling pressure across Asia in the wake of Lehman's demis.
In Tokyo, investors unloaded shares in institutions named as some of Lehman's biggest lenders, including Aozora Bank Ltd., Mizuho Corporate Bank Ltd., Shinsei Bank Ltd. and Mitsubishi UFJ Financial Group, Inc.
Aozora, a midsize Tokyo-based bank, lost 15.8 percent to 171 yen, even as the company in a statement sought to reassure markets that its net exposure could be reduced to less than US$25 million compared with an initially reported figure of US$463 million.
Mizuho Financial Group, Inc., the parent company of Mizuho Corporate Bank, retreated 10.7 percent to 418,000 yen.
Shinsei lost 16 percent to 314 yen, and Mitsubishi UFJ Financial Group tumbled 7.7 percent to 792 yen.
In China, the overnight debacle on Wall Street outweighed any positive impact from a decision by China's central bank late Monday to cut a key lending rate.
"Almost all the banking shares dropped by nearly 10 percent today because investors don't think the interest rate cut will really boost the market," said Wang Xiaodong, deputy manager of United Securities in Beijing.
Industrial & Commercial Bank of China, the country's biggest lender, fell by the daily 10 percent limit to 3.80 yuan, while Bank of China dropped 9.2 percent to 3.17 yuan.
Australia's banks, including Commonwealth Bank of Australia, ANZ Banking Group and National Australia Bank Ltd., were also hit hard.
In Seoul, top lender Kookmin Bank shares slid 8 percent. Hong Kong's HSBC weakened 3.4 percent, while China Construction Bank tanked 8.2 percent to HK$5.15.
Hong Kong government officials said they were keeping a close eye on the markets.
"We know Hong Kong has a good monitoring system in place. I believe all monitoring agencies will make sure trading is conducted smoothly today," said Chan Ka-keung, secretary for financial services and treasury.
A wilting dollar compounded the heavy sell-off, dragging down major exporters like Toyota Motor Corp., which declined 3.8 percent and home appliance producer Matsushita Electric Industrial Co., which fell 6.18 percent.