Talks to sell Lehman Brothers faltered, triggering concerns that the investment bank may be heading into bankruptcy and prompted banks to call an emergency trading session to unwind positions with the firm.
Barclays Plc, which had appeared to be frontrunner to take over Lehman has pulled out of the bidding, as top bankers and regulators met for a third day to try to resolve the crisis.
The British bank withdrew because the US government would not provide financial guarantees, according to sources.
In a sign that bankers and regulators were preparing for the worst, an emergency session opened today in New York between dealers with Lehman Brothers counterparty risk, the International Swaps and Derivatives Association said.
The aim is to reduce risk associated with a potential bankruptcy filing by Lehman Brothers.
Lehman has been collapsing under the weight of toxic assets, mainly related to real-estate, that are now worth only a fraction of their original prices because of the credit crisis triggered by America's housing bust.
The crisis at Lehman presents a delicate balancing act for US Treasury Secretary Henry Paulson and the Federal Reserve, who have urged Wall Street chiefs to come up with their own solution.
So far this year, the government has sponsored rescues of Lehman rival Bear Stearns and mortgage lenders Freddie Mac and Fannie Mae.
The authorities do not want to be accused of encouraging excessive risk-taking by bailing out another yet another investment bank.
But they also cannot afford to let a blow-up of Lehman paralyze the financial system and deepen the credit crisis.
Investors have said that if nothing is done by tomorrow, global financial markets could plunge.