Even a year ago, as the credit crisis erupted on Wall Street, it would have been inconceivable that one of the world’s biggest banks would be fighting to stave off collapse.

Last night, however, the future of Lehman Brothers — a 158-year-old American investment bank — was in peril as potential rescue buyers walked away.

At the same time, Merrill Lynch, one of Wall Street’s most powerful banks, opened talks for a $40 billion (£22.3 billion) rescue bid with a US mortgage bank, Bank of America, to secure its own future.

The two cases form some of the most astonishing developments on Wall Street in living memory as America’s housing crisis, the credit crunch and the recession show no sign of slowing.

Should Lehman Brothers collapse overnight, it would cause havoc across Toyko, the City and Wall Street as traders from other banks seek to dump any investments connected with Lehman as quickly as possible.

Last night, traders across Wall Street and the City were ordered back to their desks to try to calculate the value of business they had oustanding with Lehman Brothers.

It was not just traders who were at work over the weekend.

Henry Paulson, the US Treasury Secretary, convened an emergency summit on Friday evening to try to devise a rescue plan for Lehman Brothers. He summoned the chief executives from the world’s biggest banks — including JP Morgan Chase, Citigroup, Morgan Stanley, Merrill Lynch and UBS — to try to urge them to inject $35 billion of new funds to prop up Lehman Brothers.

He also tried to work out a rescue deal by which Bank of America or Barclays, the British high street bank, would acquire part of the Lehman Brothers. However, during the course of Saturday and Sunday, both Bank of America and Barclays rejected the prospect of a rescue deal because Washington had expressed reluctance to bankroll it.

Only in February, Bear Stearns, then the smallest of Wall Street’s banks, collapsed and Washington provided $29 billion in taxpayer funds to ensure that a larger bank, JP Morgan Chase, would buy it at a very low price. Last week, Washington was forced to bail out two of the biggest US mortgage banks, Fannie Mae and Freddie Mac, to prevent the American home loan system from collapse.

With US elections less than two months away, Mr Paulson had been adamant that taxpayer funds could not be deployed to bail out another bank.

Lehman Brothers has been perceived as vulnerable to a sale or at worst collapse, since the fall of Bear Stearns this year. Lehman, under the management of Dick Fuld, the chief executive, began to heavily invest in both residential and commercial real estate in the late Nineties, just as America’s property boom was taking off. The bank has the most amount of real estate assets of any of the Wall Street banks, and as the American property bubble burst two years ago, so did the value of Lehman’s investment portfolio.

While it has been trying to dump those assets — only last week it wrote off another $3.9 billion worth of securities — it has failed to clean up its books. On Wednesday Mr Fuld admitted to shareholders that the bank had plunged into a $2 billion loss for the third quarter of the year.

Washington decided that Lehman was unlikely to survive on Thursday, just as Mr Fuld tried to find a buyer. Shares in the bank have fallen by 97 per cent since the beginning of the year, valuing the bank at about $3 billion on Friday night.

That valuation showed the severe lack of confidence by Wall Street and the City — the bank actually controls more than $600 billion worth of assets and its fund-management business alone is thought to be worth $10 billion.

Wall Street experts do not believe the worst is over. Chris Whalen, co-founder of Institutional Risk Analytics, a consultancy on Wall Street, told The Times: “Lehman struggled on, hoping for a bounce, but there is no bounce. And there isn’t go to be. Once Lehman is out of the picture, the hedge funds will focus on the next bank. Unless Washington puts some money on the table, other banks will go insolvent, and there will be a run on a number of banks by the election.”

Lehman Brothers failed to return calls last night.

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