"If AIG fails tomorrow morning, it's the same thing written all over this market," Cheslock said. "I don't think anyone is going to want to take any positions overnight."





US stocks closed sharply loweras worries about AIG—on top of the crises at Lehman and Merrill—sparked a 500-point drop in the Dow. Markets in Asia and Europealsosold off, though Tokyo and several other Asian money centers were closed for holidays.

The dollar sank against the yen and the euro.

Oil prices, responding to the turmoil in financial markets more than Hurricane Ike, plunged to $92 a barrel.

But AIG's survival remains uncertain, and investors are worried that there are other companies that may need to raise capital to cover mortgage-related losses.

Treasury Secretary Henry Paulson said on Monday the U.S. financial system remained sound despite current stresses and he was prepared to take further actions if necessary to maintain stability.

"So far, the efforts of the US government have failed to bring any stability to the financial markets,'' said Kathy Lien, director of currency research at Global Forex Trading.

Advice for Investors

Besides AIG, investors were also watching these developments late Monday:

—Lehman Brothers , which filed for bankruptcy Sunday to became the largest casualty of the global credit crisis, is in advanced talks to sell its investment management business, including the crown jewel, Neuberger Berman.

—Bank of America's purchase of Merrill Lynch for $50 billion in stock will create a banking giant that offers everything from fixed-income trading to credit card lending.

The events of the past few days signal a seismic shift in Wall Street's power structure, with big name investment banks biting the dust and major banks like Bank of America and JPMorgan Chase becoming the survivors.

"It's a return to pure capitalism, the survival of the fittest—the government can't and won't bail everybody out," said Justin Urquhart Stewart, investment director at 7 Investment Management in London.

"This shows the U.S. government is saying 'enough' after saving other institutions, and that they see Lehman as a private affair," said Marie-Pierre Pillon, head of equity and credit research at Groupama Asset Management in Paris. "I think today and tomorrow there will be a panic on the markets."