Asian markets plunge, stocks sag in Europe, too

TOKYO -- Asian stock markets plunged Tuesday, shaken by the news that two pillars of Wall Street had crumbled over the weekend. Major European indexes were also lower.

European shares fell to their lowest level in more than three years by midday Tuesday. The continued uncertainty about the fate of U.S. financial institutions dragged down financial stocks.

The FTSEurofirst 300 index of leading European shares was down 2.6% at 1,091.41, having earlier hit 1,089.42, its lowest since May 2005.

Britain's FTSE 100 sank 3.2% to more than three-year lows, while both Germany's DAX and the French CAC 40 were down 1.8%.

Earlier, the demise of Lehman Bros. and Merrill Lynch — and American Insurance Group's struggle for survival — spooked investors in Tokyo and Hong Kong, where the reaction to the bad news had been delayed because markets were closed for holidays Monday.

Tokyo's benchmark Nikkei 225 index skidded nearly 5%, or 605 points to a three-year low 11,609.72 Tuesday, and Hong Kong's Hang Seng plummeted 5.4%, or 1,052 points, to 18,300.61. Elsewhere, South Korea's Kospi index fell 6% and Taiwan's benchmark lost 4.7%.

The dollar also fell below to 105 Japanese yen Tuesday afternoon from more than 107 before the weekend chaos.

Torpedoed by $60 billion in soured real-estate holdings, Lehman sought bankruptcy protection after failing to arrange a rescue in frantic weekend negotiations. Merrill agreed to be taken over by Bank of America to avoid a similar fate.

In a report Monday, Chi Lo, director of investment research for Ping An of China Asset Management, noted that 158-year-old Lehman Bros. had endured the massive U.S. railroad bankruptcies of the 19th century and the Great Depression of the 1930s — but could not survive its exposure to the toxic U.S. market in sub-prime mortgages.

"Everybody's scared," he said Tuesday. The fear: Other financial institutions may have been contaminated by their links to Lehman and Merrill — or by their own contact with the U.S. sub-prime mortgage market. In Japan, for instance, shares in Aozora Bank plunged 16% Tuesday an reports it had lent $463 million to Lehman; Aozora said that its actual exposure to Lehman was just $25 million.

The Bank of Japan — the Japanese central bank — pumped $24 billion into financial markets Tuesday and promised to "carefully monitor recent situations surrounding the U.S. financial institutions and their influences" and "maintain stability." A day earlier, the Chinese central bank cut interest rates in what Lo described as a pre-emptive move to limit the damage from U.S. financial markets.

On Wall Street, Monday, the Dow Jones industrial average plunged 4.4% — its worst drop since the aftermath of the 9/11 attacks on New York and Washington.

Contributing: wire reports