American International Group (AIG), one of the world's biggest insurers, has been saved from the brink of collapse after the US Federal Reserve, America’s central bank, agreed an $85 billion (£47 billion) bailout of the company.

The deal gives the US Government a 79.9 per cent stake in the insurer. The central bank hopes that the rescue loan will halt plummeting financial markets, which are already reeling from the collapse of Lehman Brothers and sale of Merrill Lynch at the weekend.

AIG will pay a high rate of interest for the two-year loan and the US Government will have the right to stop payments of dividends to shareholders.

Henry Paulson, the US Treasury Secretary, said that he approved the bailout to "mitigate broader disruptions [and] protect taxpayers".

The rescue signals a volte-face by the US Government which had indicated that it would not rescue any more financial institutions.

Mr Paulson had been reluctant to provide a loan just six weeks before the presidential election because taxpayers are already furious at the $29 billion spent in February rescuing Bear Stearns, another Wall Street investment bank.

Most recently, the Government agreed to prop up Fannie Mae and Freddie Mac, the US mortgage giants, to the tune fo $200 billion.

Nancy Pelosi, Speaker of the House of Representatives, criticised the loan, calling it "just too enormous for the American people to bear the risk". "Congress will demand answers to prevent this from happening again," she said.

There was some good news for Lehman employees in the US after Barclays agreed in the early hours of today to buy the defunct bank's US investment banking and capital markets businesses for £140 million.

The British bank will also buy the New York headquarters of Lehman as well as two other outlets in New Jersey for £800 million. Many of the 10,000 people who work for the businesses will move to Barclays.

The bank willl raise at least £600 million from investors to part-fund the deal.

But the Fed rescue of AIG did little to comfort investors in Asia, who continued to pull their money from the insurer's savings products.

There were queues outside the offices of AIG and its subsidiary American International Assurance Company (AIA) in Singapore, despite assurances from the country's central bank that AIA had enough assets to meet its liabilities to policyholders.

Asian markets were also spooked by events on Wall Street. The Hang Seng index in Hong Kong ended morning trading down 339.41 points, a fall of 1.8 per cent, to 17,961.20. Australia’s S&P/ASX 200 shed 0.4 per cent.

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