The ISEQ index of Irish shares is down almost 5% after US efforts to rescue of insurance giant American International Group failed to ease fears in world markets.

In early trading, US markets are down with the Dow Jones Industrial Average off almost 3%.

In London, the FTSE tumbled 2.25%, the Paris CAC is down 2.1% and in Frankfurt, the DAX was down 1.75%.

Financial stocks are the main casualty as the market reacted to a trading statement from Bank of Ireland confirming that loan arrears are set to worsen.

Bank of Ireland, which lost almost 15% today, has told the markets it is cutting its shareholder dividend by 50% and taking other measures to strengthen its financial position.

The bank said difficult trading conditions would negatively impact its profits in the current financial year.

The bank also said the level of mortgage arrears on its loan books could more than double for its year to March 2010.

Late last night the US Federal Reserve took emergency action to save AIG from bankruptcy.

AIG will get an $85bn loan, in return for an 80% public stake in the firm.

The rescue follows the collapse of US investment giant Lehman Brothers, which caused share prices to plummet across the world's financial markets.

Meanwhile, British bank HBOS has confirmed that it is in advanced talks that may lead to a takeover by rival Lloyds TSB.

HBOS - which is one of Britain's biggest banks - has been the victim of negative sentiment about its financial health and its share price has collapsed in recent days.

Financial Regulator CEO backs Irish banks

The Financial Regulatory Authority Chief Executive has said Irish banks are resilient and have the capacity to cope with the current turbulence in financial markets.

Patrick Neary said the Regulator and the Central Bank remained on 'high alert' and were watching for any emerging risks.

He also said the financial turmoil was likely to go on for some time

However, Mr Neary said new regulations and the availability of funds from the eurozone meant that Irish banks were in a position to benefit from a 'solid base' when hit by turmoil.

He also said Irish banks had only limited exposure to losses linked to the US sub-prime mortgage crisis.