(Recasts lead, adds VIX closing levels in paragraph 2 and fresh analyst comments in paragraphs 5, 6, 9)

CHICAGO, Sept 17 (Reuters) - The Chicago Board Options Exchange Volatility Index .VIX or VIX, Wall Street's main barometer of investor fear, closed on Wednesday at its highest level in almost six years as fretful investors scrambled for options to protect portfolios and drove risk premiums higher.

Rattled investors dumped equities due to worries the U.S. government rescue of insurer American International Group AIG.N would not stem market turmoil.

As a result, volume and volatility soared in the options market. The VIX jumped 14.84 percent to 36.22 and posted its highest close since Oct. 10, 2002.

This week’s 10.43 point gain in the VIX is its biggest three-day rally since Aug. 5, 2002.

“Suffice to say, judging by the VIX, anxiety, pessimism and fear have reached an extreme,” said options strategist Frederic Ruffy at web site WhatsTrading.com.

The VIX measures near-term anticipated stock market volatility embedded in Standard & Poor's 500 index .SPX option prices.

“Investors are waking up to the reality that nothing is safe in the investment world. The continued weakness in banks leaves the entire market vulnerable,” said Andrew Wilkinson, senior market analyst at Interactive Brokers Group.

The options fear gauge generally rises when the S&P benchmark falls and has topped the 30 level during this week’s steep stock market sell-off and crisis regarding the stability of the financial industry.

Trading in the index options market was brisk on Wednesday. In the S&P 500 puts, volume surged to three times the usual with about 1.3 million SPX puts and 624,000 calls traded on the day, according to option analytics firm Trade Alert.

“Investors are frantic, driving the VIX to the most fearful level of the day. They have been bidding up the price of options with the aim of protecting their portfolios against further wild swings in stocks,” Wilkinson added.

“These are difficult times for traders and investors because of the high volatility leading to moves that are larger and more unexpected and more disconcerting from a risk standpoint,” said Herb Kurlan, chief executive of vTrader Pro, an online trading firm.