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US stocks have plunged to a three-year low amid continuing financial volatility and despite the bailout of American insurance giant AIG.

The Dow Jones industrial average fell more than 4% to end at 10,609.66.

European indexes had earlier also fallen, with investors unnerved by recent dramatic events, sparked by the demise of Lehman Brothers.

After AIG's collapse, the White House said the US Treasury was working to see if it could stem other losses.

White House spokeswoman Dana Perino defended the $85bn (£48bn) emergency loan for AIG.

"While no-one would have liked to have ended up in this situation, you have a government that is willing to lead," she said.

How big are these companies?

Ms Perino insisted: "Our economy has the strength to be able to deal with these shocks."

However she said the government was still concerned about the stability of other big financial companies and it would take time to work through what she called these challenging times.


The global financial crisis

In pictures

President George W Bush has not answered questions on the economic situation and had cancelled a statement he was set to make on Tuesday.

When asked by a reporter in the Oval Office on Wednesday to comment, Mr Bush said he had not heard the question and joked: "I'm old."

It was a difficult day for the two remaining independent US investment banks, Morgan Stanley and Goldman Sachs, which both fell heavily on Wall Street.

Morgan Stanley was down 24% at $21.75 despite better-than-expected quarterly profits. Goldman Sachs fell 13.9% to $114.50.

The tech-heavy Nasdaq index also plummeted - shedding 4.94% to 2,098.85.


I don't think anyone has got any or much confidence in market direction for more than a few days
Darren Winder, Cazenove

John O'Brien, senior vice president at MKM Partners LLC in Cleveland, told Reuters news agency: "It almost feels like people scour the books and say, 'Who is the next likely target?' and that spreads continuous fear."

Analysts said the reaction to the government's AIG bailout was "tepid at best".

Patrick O'Hare at Briefing.com said: "The realisation that it doesn't fix the underlying problem is an ongoing concern that is mitigating the market's enthusiasm for the plan."

Shares in AIG fell a further 45% to $2.05.

Earlier the FTSE 100 closed 2.2% lower while France's Cac 40 shed 2.1% and Germany's Dax shed 1.7%.

It has been a tumultuous week on financial markets, with significant changes in the financial landscape.

Finance shares globally were among the most volatile.

Top UK mortgage lender HBOS had a rollercoaster ride before news in after-hours trade that it was to be taken over by Lloyds TSB.

By close of trade HBOS was 19% lower, while Royal Bank of Scotland shed 10.4%.

Topsy-turvy trade

Trade is likely to remain rocky amid concern that financial system instability will continue after the dramatic events of the past few days.

"I don't think anyone has got any or much confidence in market direction for more than a few days," said Darren Winder, a strategist at Cazenove.

AIG's bailout followed the collapse of Lehman Brothers, which caused share prices to plummet across the world's financial markets.

Another investment bank, Merrill Lynch, has been sold off to Bank of America.

Russia's stock exchange suspended trade following steep falls in shares.

Asian shares had a mixed session. Stocks in Tokyo, Taipei, and Seoul all rose, although prices in Hong Kong, Shanghai and Australia lost ground.

Japan's Nikkei 225 index ended up 1.2% at 11,749.79, having risen by as much as 2.3% earlier in the day. The index had hit a three-year low on Tuesday.

Hong Kong's Hang Seng index ended down 3.6% at 17,637.19 points.