NEW YORK - US SHARES went into a freefall on Monday as part of a global rout after a bankruptcy at Lehman Brothers stoked fears about contagion affecting world markets and the economy.

The blue-chip Dow Jones Industrial Average tumbled below 11,000 with a loss of 504.48 points (4.42 per cent) to 10,917.51, its largest point loss since the reopening after the September 2001 terrorist attacks.

The Nasdaq composite plummeted 81.36 points (3.60 per cent) to 2,179.91 and the broad-market Standard & Poor's 500 index lost 59.00 points (4.71 per cent) to 1,192.70.

Also causing fear was the worry that contagion may strike American International Group, one of the world's biggest insurers, whose shares plunged over 50 per cent.

'Everything else is pushed aside as the stock market attempts to figure out what the sale of Merrill and bankruptcy of Lehman will do to both the stock market and the economy,' said Mr Al Goldman at Wachovia Securities.

'The first response will be to hit the stock market hard as the market hates uncertainty.'

Analysts at Charles Schwab said in a briefing note that markets feared more troubles ahead.

'Lehman Brothers' decision to file bankruptcy and worries that the credit crisis could claim American International Group as the latest casualty are fueling the fears on the Street,' the analysts said.

'Merrill's purchase has traders fretting that hidden problems abound and more firms could be looking at a fate similar to Lehman's.'

Some feared a financial tsunami as firmed linked to Lehman Brothers scramble to cover their positions, possibly leading to more selling pressure.

In anticipation of a further credit shock, the Federal Reserve on Sunday moved to ease liquidity for banks and brokers by relaxing collateral requirements for central bank loans.

In a related action, 10 major global banks pledged a total of US$70 billion (S$99.7 billion) to help each of them stave off a credit crisis.

Analysts said the central bank's Federal Open Market Committee, set to meet on Tuesday on interest rates, might be forced to cut rates in a further reassurance to markets.

The Fed has kept its base rate at 2.0 per cent since April.

Lehman shares, delisted from the New York Stock Exchange, plunged 94 per cent to US$0.21.

American International Group, one of the world's biggest insurance companies, slid 60.8 per cent to US$4.76 on fears it may too face a death spiral from a cash crunch and possible credit downgrade.

Merrill Lynch, Lehman's white-shoe rival on Wall Street, managed to get a lifeline over the weekend with a deal to sell itself for US$50 billion to Bank of America.

Merrill shares rose 0.06 per cent to US$17.06 but Bank of America fell 21 per cent to US$26.55.

Washington Mutual, a west coast bank facing its own squeeze, slid 26.7 per cent to US$2 amid ongoing fears it may be take over by banking regulators.

Among other financial firms, Citigroup sank 15 per cent to US$15.24, Goldman Sachs shed 12 per cent to US$135.50 and Morgan Stanley dropped 13.5 per cent to US$32.19.

Among the few bright spots in the market were airline shares, helped by a slide in oil prices well below US$100 a barrel.

United Airlines parent UAL jumped 8.8 per cent to US$12.36 and American Airlines holding AMR added 8.8 per cent to US$11.30.

A rush into Treasury bonds by shell-shocked investors pushed up prices.

The yield on the 10-year Treasury bond tumbled to 3.483 per cent from 3.730 per cent on Friday and that on the 30-year bond eased to 4.152 per cent against 4.326 per cent.

Bond yields and prices move in opposite directions. -- AFP