Fears that further financial casualties were inevitable abounded on Wall Street this morning as shares in Morgan Stanley appeared to be in freefall and the US Government reportedly asked big banks to put together a rescue buyout of Washington Mutual.

Shares in US investment bank Morgan Stanley were down by 40.63 per cent this morning, gaining a little ground to close 24 per cent down at $21.75 while its larger rival Goldman Sachs closed down 14 per cent at $114.50, even after both reported better-than-expected earnings yesterday. The cost of protecting Morgan Stanley and Goldman’s debt also spiked.

The US Government has asked big banks, including HSBC, to put together a rescue buyout of Washington Mutual, the American lender, according to a report.

The banks involved include Wells Fargo, JPMorgan Chase and HSBC but the report in the New York Post said that no deal talks were being held between the banks and WaMu.

Shares in WaMu, which is America's largest savings and loan institution, have plunged by 49 per cent over the past month and 83 per cent this year. Its shares today fell by a further 13.36 per cent to $2.01.

WaMu's bank's non-performing assets — bad debts — jumped to 3.62 per cent in the second quarter, up from 2.87 per cent. It has been forced to put aside more than $8 billion to cover bad debts in its mortgage book.

Uncertainties about the make-up of the mortgage book is an obstacle to finding a buyer or buyers for WaMu, the paper said, quoting an unnamed source saying that there may only be a "minimum amount of value" in WaMu's loans business.

The Government's move follows last night's rescue of American International Group (AIG), the troubled insurance group, and once one of America's biggest, for $85 billion. The US Treasury today also announced it was creating a supplemental funding programme to ensure that the Federal Reserve has the cash it needs and that its ability to offer emergency liquidity support for the markets is not constrained by the size of its own balance sheet.

The move was intended to dampen fears that the US central bank’s balance sheet was overstretched following the AIG bailout. However, it did little to calm nerves on Wall Street and around the world.

The Dow Jones industrial average closed 449.40 points lower at 10,609.7. In London, the FTSE 100 index suffered its third consecutive day of brutal losses, dropping by a further 2.3 per cent to take its losses so far this week to 9.3 per cent. The blue-chip benchmark closed down 113.2 points at a new three-year low of 4,903.3, the first time it has closed below that left it below the watershed of 5,000 for the first time since June 2005.

The cost of borrowing overnight dollars spiked above 10 per cent, indicating a deep lack of trust spooking the inter-bank lending market in Europe.

Bank of Ireland became the latest bank to cut its dividend, causing a sell-off in Irish banking shares.

And Gordon Brown intervened personally in attempts to rescue HBOS, Britain’s biggest savings bank, which is in emergency talks to be acquired by Lloyds TSB.

The talks underscore how quickly authorities around the world are ditching long-held beliefs about free markets and competition as they seek to counter the credit crunch.

Lloyds, for example, was previously blocked from buying a smaller mortgage bank.

Then there was the shock British government decision in February to put Northern Rock into public hands - the first major nationalisation in Britain since the 1970s.

US authorities also have moved to prop up the financial system, bailing out AIG and earlier, Fannie Mae and Freddie Mac.

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