World stock markets turned sharply lower Monday after being hit by a double-fisted blow from Wall Street — news that Lehman Brothers had filed for bankruptcy and Merrill Lynch would be sold to Bank of America.

In Europe, the FTSE-100 share index closed down 3.9 percent in London, the Paris CAC-40 was off 3.8 percent and Germany's DAX 30 index of blue chips sagged 2.7 percent.

Japan's stock market, which was closed Monday for a holiday, opened with steep losses Tuesday. The benchmark Nikkei stock index dropped more than 4 percent in early trading. South Korea's leading stock index also shed 5.4 percent in the first 20 minutes of trading Tuesday after reopening following Monday's holiday.

In the U.S. on Monday, the Dow Jones industrial average fell 504.48 points, or 4.42 percent — its largest point drop since the Sept. 11 attacks — in New York trading.

Broader stock indicators also fell. The Standard & Poor's 500 index declined 59.00, or 4.71 percent, to 1,192.70, and the Nasdaq composite index fell 81.36, or 3.60 percent, to 2,179.91.

In Russia, where stocks were already suffering from falling oil prices and worries about political interference in business, the MICEX index was down 6.2 percent and RTS index was 4.8 percent lower.

The falls were led by insurance and financial stocks, with shares in French insurer AXA SA down 8.5 percent, Germany's Commerzbank AG falling 9 percent, and Britain's HBOS 17.55 percent lower.

"In the short term, we are looking at a fresh wave of weakness hitting financial markets," said Chloe Magnier, chief economist at Saxo Bank in Paris. "I'm not optimistic about the coming months."

Bond prices surged as investors fled to the security of government debt. The yield on the benchmark 10-year Treasury note, which moves opposite its price, plunged to 3.54 percent from 3.72 percent late Friday. The dollar was lower against other major currencies, while gold prices rose.

Europe's major central banks moved quickly to calm markets Monday, pumping billions of euros and pounds into the financial system.

Similarly, the Bank of England offered up 5 billion pounds (nearly $9 billion) in a three-day auction.

The 158-year-old Lehman Brothers Holdings Inc. filed Monday for Chapter 11 bankruptcy. The company was crippled by $60 billion in soured real-estate holdings and unable to find an investment partner to throw it a lifeline.

Officials from the government and various banks failed to find a solution during weekend meetings. During the talks, when Bank of America balked at buying Lehman, the government urged it to buy investment bank Merrill Lynch instead.

The $50 billion deal may stop speculators whose next target after Lehman would have been Merrill, according to Stephen Pope, chief global market strategist at Cantor Fitzgerald Europe in London.

The moves will create a "firebreak in the financial structure," and once disappointment that Lehman didn't manage to make a deal has been digested, stocks will start to recover, he said.

"You are going to have a torrid day today, probably tomorrow as well, but then I think people are going to start thinking there's some opportunity out there to be engaged," he said.

Before that, markets also have to react to a possible restructuring of the world's largest insurance company, American International Group Inc. AIG's troubles a week after its stock dropped 45 percent are perhaps most worrisome for some investors because of the company's enormous balance sheet — and the risks that its troubles could spill over to its customers.

Light, sweet crude for October delivery fell $3.57, or 3.53 percent, to 97.61 a barrel on the New York Mercantile Exchange, after earlier dropping to $94.13, the lowest level since Feb. 14.

Among Asian markets that were open for business, India's Sensex tumbled 3.4 percent, Taiwan's benchmark plummeted 4.1 percent and Singapore dropped 3.2 percent.

In Latin American markets also tumbled, with Brazil and Argentina falling the hardest, with 7.6 percent and 5.2 percent drops. In Mexico, the market slipped 3.8 percent, while in Chile stocks were down 0.7