Stock markets were volatile on Tuesday after the key US investment bank Lehman Brothers filed for bankruptcy.
The Dow Jones industrial average shed 100 points after the US Federal Reserve left interest rates unchanged at 2% but later closed 141 points higher.
Traders saw the central bank's move as a sign that the economy was in better shape than they feared.
But leading indexes elsewhere ended lower. The UK's FTSE 100 shed 3.4%, the Cac-40 fell 1.9% and the Dax shed 1.6%.
Banking shares were badly hit with HBOS losing about 35% at one point.
Lehman Brothers, which may be about to sell its core assets to Barclays, became the latest victim of the global credit crunch on Monday.
Lehman's collapse has continued to reverberate:
Central banks around the globe have pumped funds into the money markets, including $50bn (£28bn) from the US Federal Reserve, £20bn from the Bank of England and 70bn euros ($100bn; £56bn) from the European Central Bank.
US insurer AIG saw its shares slump by more than 70% at one point amid continued uncertainty over its future, though these later closed closer to 20% down.
Stock markets in Europe and Asia fell heavily.
The US benchmark Dow Jones index had dropped some 500 points on Monday - its worst session since 11 September 2001.
The FTSE 100 index of leading UK shares fell 178.6 points to 5025 at close of trade - having earlier dipped below 5,000 points for the first time since June 2005.
Big banks can no longer be under any illusion that they can make big, stupid financial bets and expect taxpayers to pick up the bill
Australia and India also pumped cash into their money markets.
Bank stocks were hard hit again across Europe; in London HBOS was down by about 22%, having fallen 35% at one point, and Royal Bank of Scotland was down 10%.
Barclays Bank - which said it was in talks to take on some of Lehman's US operations - fell 2.5%.
German finance firms were also hit with Commerzbank losing close to 12.2% and Deutsche Postbank falling 8.1%.
Meanwhile, Japanese-registered Lehman Brothers Japan and Lehman Brothers Holdings have applied to the Tokyo District Court for bankruptcy protection.
On the currency markets, the dollar slid to a four-month low against the yen before reversing earlier losses.
The collapse of Lehman, which had incurred billions of dollars of losses from the failing US mortgage market, has raised fears that other financial institutions could be hit.
"We're in the middle of a crisis," said YK Chan at Phillip Asset Management in Hong Kong.
Meanwhile, there were fears that AIG, one of the world's largest insurers, could also face collapse.
The State of New York announced a "multi-billion dollar financing plan" on Monday to stabilise the insurer's finances.
'Rough spots' ahead
On Monday, US Treasury Secretary Henry Paulson said the US was "working through a difficult period in our financial markets right now as we work off some of the past excesses".
Henry Paulson was upbeat despite the turmoil
He said Americans could remain confident in the "soundness and resilience" of the US financial system.
But he warned that uncertainty remained and it was likely that there would be further "rough spots" ahead until the correction of the US housing market was completed.
Mr Paulson said he was committed to working with regulators in the US and abroad, as well as policymakers in Congress to take the necessary steps "to maintain the stability and orderliness of our financial markets".
But he gave no details of what such steps might mean.
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