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"Our priority now is to work with management and trading counterparties to agree the manner in which the assets and liabilities will be handled."

The Financial Services Authority, the City watchdog, said today: "The FSA is working with market practitioners, including the London Clearing House, to ensure the process connected with the winding down of this wholesale business is completed in an orderly manner to minimise any market disruption."

More than 26,000 jobs are at risk across Lehman’s global operations. Earlier this year, the bank, which has written down billions of dollars on toxic assets linked to the US mortgage market, said it would cut 5 per cent of its workforce.

Workers at Lehman Brothers' Canary Wharf headquarters were said they were "numb" at today’s developments.

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A Niagara of liquidation fell upon the American Stock Exchange today

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One source said: "People are just trying to absorb what happened and get as much information as they can, but there's been no big official meetings. There have been talks division by division."

The source said that staff were told to come in to work today as normal and were "trying to be professional, cancelling appointments" but have been warned not to enter into any trades without sign-off from their superiors.

The hunt is now on for which banks are exposed to Lehman and, at the weekend, traders at all the leading banks were ordered back to their desks to calculate their exposure to a possible collapse of the lender.

While the bank has widely been perceived as most vulnerable because of its substantial holdings of mortgage-backed securities, it was the US Treasury's refusal to bankroll a rescue that was seen as preventing other parties from bailing out the bank.

US authorities had tried to secure a rescue deal for Lehman Brothers over the weekend.

Hank Paulson, the US Treasury Secretary, and Tim Geithner, president of the New York Federal Reserve Bank, had convened an emergency meeting in New York on Friday evening to try to convince other banks to rescue Lehman.

American authorities had hoped to ring-fence $85 billion worth of Lehman's real estate assets into one company, which they wanted banks, such as Citigroup and JP Morgan Chase, to prop up with $35 billion of new capital.

Mr Paulson had hoped to persuade the banks to inject new money to prevent a fire sale of Lehman's assets, a move which could have triggered a fall in the value of their own securities.

On Sunday evening, Lehman Brothers, whose shares have fallen about 94 per cent over the year, was left in a vulnerable position.

Over the weekend, the bank hired bankruptcy specialists in the event that all other funding routes failed.

The collapse of Lehman and purchase of Merrill is likely to worsen an already difficult financial sector job market.

Headhunters said today that the US had already seen 100,000 jobs go in finance in the past year and that it was likely to see a further 50,000 cut.

Staff from Bear Stearns, which was bought by JPMorgan Chase in February, are still thought to be looking for work. Recruitment consultants said that they expected resumes to start flooding the market this morning.

The Federal Reserve is expected to try to help banks exposed to Lehman to use a wider range of collateral to borrow funds from the central bank.

In addition, 10 leading banks said they would pool $70 billion of their own money to create a borrowing facility. The institutions, which include Citigroup, Credit Suisse and Deutsche Bank, could tap the pool to help them ride out the crisis.

At Lehman's New York headquarters in midtown Manhattan, employees were seen removing their belongings from the building ahead of the bank's expected collapse.

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