Asia-Pacific shares outside Japan hit a 2-year low after one of the most explosive 48-hour periods in finance that accelerated a sweeping move out of risky assets. Investors bailed out of commodity-related funds, knocking oil prices below $92 a barrel and weighing broadly on metals prices.

Lehman Brothers filed for bankruptcy, Bank of America agreed to buy Merrill Lynch, the Fed expanded its emergency liquidity provisions and American International Group (AIG) , once the world’s biggest insurer, was seriously constrained by short-term funding trouble.

Tokyo’s Nikkei share average dropped 4.95 percent to its lowest in three years.

Markets in Japan, South Korea, China and Hong Kong had been closed on Monday, and quickly followed the sell-off in New York, where the Dow Jones industrial average slid more than 500 points, or 4.4 percent, in its biggest one-day point drop since re-opening after the September 2001 attacks.

The financial sector was hit by a wave of selling. Shares of Japan’s top lender Mitsubishi UFJ Financial Group <8306.T> fell 7.7 percent and Australia’s Macquarie Group dropped 6.5 percent.

An MSCI index of Asia-Pacific stocks outside Japan was down 4.7 percent to the lowest since August 2006, and has now slumped 44 percent from a peak last October.

WORLD WATCHES AIG’S FATE AS CREDIT SPREADS WIDEN

The indiscriminate selling in risky assets has hurt emerging market equities especially hard. Valuations of emerging market stocks are currently 9.2 times expected earnings 12 months from now, compared with a low of 10.2 times reached during the Asian financial crisis about a decade ago.

Still, there appeared no near-term end to the shift out of the region. The cost of protection against default and restructuring surged in emerging Asia reflecting the growing expense of capital.

The iTRAXX Asia ex-Japan high yield index, a gauge of risk aversion, rose to a record high in anticipation of a deeper impact as a result of U.S. financial sector havoc.

AIG, whose stock plummeted 61 percent overnight, secured a $20 billion (11.14 billion pounds) lifeline brokered by New York State officials on Monday, but Standard & Poor’s cut its long-term counterparty rating on the insurer. Moody’s also downgraded AIG’s senior unsecured debt rating.

Time was not on the company’s side. A default by the company could have big ramifications in the global financial system because of the firm’s diverse credit and debt derivative holdings.

"This would have a much bigger impact than a bank going down like Lehman or Bear or even a Wachovia or WaMu in the U.S. AIG has a much bigger presence globally. Their reach to a global customer base is quite sizable," said Lorraine Tan, director of research, Asia with Standard & Poor’s in Singapore.

The U.S. dollar slipped to 104.30 yen after ending overnight in New York around 104.54 yen. It had its biggest single-day decline against the yen on Monday in nine years.

The euro crept up to $1.4272 after ending at $1.4263 on Monday, but the 15-nation currency slipped to 148.80 yen from 149.10 yen on Monday.

The U.S. dollar was dumped on Monday as markets quickly priced in a 90 percent chance of a 25 basis point rate cut by the Fed after a meeting later and some analysts speculated about a more aggressive 50 basis point cut.

Japanese and U.S. government debt yields, which move in the opposite direction to prices, dropped as investors sought safety.

The yield on the 10-year Japanese government bond in the cash market fell to a 5-month low of 1.375 percent before recovering to 1.465 percent.

The yield on the policy-sensitive U.S. two-year Treasury note fell to 1.67 percent, the lowest since mid-April, before edging back up to 1.71 percent. The 10-year yield slipped to 3.37 percent from 3.41 percent late on Monday in New York.

Oil dropped $3.68 a barrel to $92.03, its lowest since mid-February. Crude was thrown into the pile of assets being liquidated by investors around the world to fund losing bets and to cut their exposure to risk.

Even gold, a traditional safe-haven in times of financial stress, fell 1.45 percent as investors treated it as another risky commodity.

(Additional reporting by Sonali Paul in MELBOURNE; Editing by Jan Dahinten)