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.

"There is no hiding for anyone here. The global money pool -- we all either have to chip into it or get some money out of it, and we’re all affected by it," said Credit Suisse chief strategist Adnan Kucukalic in Sydney.

Tokyo’s Nikkei share average <.N225> dropped 5.1 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 <.DJI> 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 8.2 percent, Macquarie Group dropped 7.7 percent and led the benchmark Australian index <.AXJO> down 2.4 percent.

An MSCI index of Asia-Pacific stocks outside Japan <.MIAPJ0000PUS> was down 4.4 percent to the lowest since August 2006, and has now slumped 44 percent from a peak last October.

South Korea’s KOSPI stock index <.KS11> plunged 5.4 percent to its lowest since March 2007, and Hong Kong’s Hang Seng <.HSI> was down 5.7 percent to a near two-year low.

MORE NEAR-TERM PAIN

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.

Adrian Mowat, JPMorgan’s emerging markets and Asia-Pacific equity strategist, said in a note that inflation in developed and developing economies has peaked, which should promote pro-growth policies among central banks. "We agree that emerging market valuations are not at distressed levels based on relative valuation. But these higher growth and improved fundamentals argue for a premium valuation of emerging market equities."

However, developments were fluid and visibility was low.

AIG, whose stock plummeted 61 percent overnight, secured a $20 billion 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.

"The U.S. financial system is never going to be the same. Events of the last 24 hours are positive, but there is likely more pain on the near-term horizon," said Donald Straszheim, vice chairman of Roth Capital Partners in Los Angeles, in a note.

The U.S. dollar slipped to 104.31 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 edged down to $1.4227 after ending at $1.4263 on Monday, and the 15-nation currency fell to 148.45 yen from 149.10 yen on Monday.

The U.S. dollar was dumped on Monday as markets quickly priced in an 88 percent chance of a quarter-percentage 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 a bit to 1.42 percent.

The yield on the policy-sensitive U.S. two-year Treasury note fell to 1.69 percent to the lowest since mid-April. The 10-year yield slipped to 3.37 percent from 3.41 percent late on Monday in New York.

Oil dropped $3.92 a barrel to $91.79, 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 more than 1 percent as investors treated it as another risky commodity.

(Additional reporting by Sonali Paul in MELBOURNE; Editing by Lincoln Feast)