Governments around the world tried to contain the fast-spreading credit crisis, but stock, bond and commodity markets saw investors bet on deepening uncertainty and a sharp downturn.
U.S. officials called for a "forceful and coordinated" global reaction to the crisis. Expectations also grew for a rate cut by the U.S. Federal Reserve, possibly as part of coordinated action with the European Central Bank.
U.S. stocks staged a late rally to cut earlier losses by half. The Dow Jones industrials closed down 3.5 percent, falling below 10,000 for the first time in four years after plunging as much as 800 points. The S&P 500 closed down almost 4 percent after touching a five-year low.
It was the first Wall Street session since the U.S. Congress approved a $700 billion bailout intended to reassure markets that help was on the way.
Instead, a crisis that began with the overheated U.S. property market and the $11 trillion U.S. mortgage market was still rocking confidence worldwide.
"The ground underneath our feet is moving like an earthquake," said acting U.S. Treasury Undersecretary for domestic finance Anthony Ryan.
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Federal Reserve Bank of Dallas President Richard Fisher—considered an inflation hawk at the Fed—said capital markets were in "semi-panic" mode and said he was more worried about markets breaking down than upward pressure on prices.
"What I'm more worried about is how dysfunctional the system has become and what we, as the lender of last resort, need to do to encourage the liquidity to flow," he said.
The U.S. Treasury, charged with putting the $700 billion fund to work to buy up bad debt, named Neel Kashkari, a veteran banker from Goldman Sachs, to head the landmark program.
Meanwhile, the New York Federal Reserve moved toward establishing a central clearing mechanism for credit default swaps—a form of over-the-counter insurance against bankruptcy blamed by critics for destabilizing the entire financial system.
Emerging markets, which had gained most from the surging global expansion in the last three years, were sucked into the vortex. Trading was halted in markets as far afield as Brazil and Russia when stocks plunged.
Mexico's peso sank to its weakest level since the currency was allowed to float in the mid-1990s, and stocks plunged.
"We are in a state of panic. Markets are out of control," said Bertrand Delgado, an economist at IDEAglobal who covers Latin America.
The banking upheaval that began on Wall Street has effectively shut down interbank and other loan markets, pushing industrialized countries closer to recession. Conditions remained poor for interbank lending.
Even as Sweden, Austria and Denmark followed Germany's lead by offering blanket deposit guarantees to savers, investors from Tokyo to London continued to slash risk and positioned themselves for a further tightening of credit.
Oil prices fell below $90 a barrel and have dropped nearly 40 percent from their peak, pushed lower with other commodity prices by worries about a looming recession.
With the U.S. presidential election less than a month away, the campaign remained overshadowed by the debate about how to confront the worst banking crisis since the Great Depression.
On Capitol Hill, lawmakers pressed for an accounting of who was responsible for the financial train wreck.
The disgraced head of Lehman Brothers Holdings told Congress that banking regulators knew exactly how the failed bank was pricing its distressed assets and about its liquidity in the months before its collapse.
Lehman CEO Richard Fuld, grilled about the failure of his bank and his own pay, said he did not know why the U.S. government chose to help other financial companies but not Lehman, as it hurtled toward bankruptcy. "Until the day they put me in the ground, I will wonder," he said.
Deals to shore up the capital and liquidity of European banks seen at risk dominated a weekend of frenzied deal-making and emergency intervention by government officials.
France's BNP Paribas agreed to scoop up assets in Belgium and Luxembourg of banking and insurance group Fortis for 14.5 billion euros ($20.1 billion) to become the euro zone's biggest deposit bank.
German officials brokered a revised rescue deal for lender Hypo Real Estate that will provide extra billions of euros of liquidity.
—Reuters contributed to this report