Global stock markets hit fresh trouble on Wednesday after the unprecedented US government bailout of giant insurer AIG failed to calm jitters and instead prompted frenzy for safe haven assets.

The turmoil spread to Russia which closed its two main stock markets for a second day as shares dived and officials pledged 44 billion dollars to fight collapsing investor confidence.

Around the world, nervous traders flocked to gold, oil and made an unprecedented rush to short-term US Treasury bills, pushing yields down to their lowest levels since 1954 for what is normally seen as the safest of securities.

The Dow Jones Industrial Average slid 4.06 percent to 10,609.66 in the second massive loss in three sessions. The Nasdaq composite nose-dived 4.94 percent to 2,098.85 and the broad-market Standard & Poor's 500 index lost 4.71 percent to 1,156.39.

In London, the FTSE 100 index tumbled 2.25 percent to 4,912.40, breaching key technical support at 5,000 points. In Paris, the CAC 40 lost 2.14 percent to 4,000.11 and in Frankfurt, the DAX was down 1.75 percent at 5,860.98.

Typifying the turmoil, shares in British banking giant HBOS had a brutal, volatile ride.

Prior to reports of talks on a deal with Lloyds TSB, shares in HBOS had nosedived 52 percent, as investors fretted it could be the next casualty.

The stock then jumped equally sharply before closing down 19.2 percent for a third successive day of heavy losses.

Other financial shares around the globe came under selling pressure as investors fretted about further failures after Lehman Brothers' huge bankruptcy on Monday and the near-meltdown at AIG.

The market action came after the US Federal Reserve agreed to a loan of up to 85 billion dollars to stave off collapse at AIG and help limit financial market contagion.

Bill Witherell, economist at Cumberland Advisors, said he was surprised by the market action.

"I expected the market would have been reassured" by the AIG rescue, he said.

"I was surprised at the continued flight to quality. Obviously investors are not reassured, they are worried about other shoes to fall."

Patrick O'Hare at Briefing.com said the reaction to the Fed's action was "tepid at best."

"The act itself should offer a measure of support for the stock market since it seems to have taken a worst-case scenario off the table, yet the realization that it doesn't fix the underlying problem is an ongoing concern that is mitigating the market's enthusiasm for the plan," he said.

Aaron Smith at Economy.com said market nerves were not calmed. "Widespread market disruptions continue," he said, citing a massive flow into oil, gold and short-term Treasury bills.

"This is evident in an unprecedented flight to quality. Investor concern is also growing about the Fed's ability to support markets in the future as the central bank's own balance sheet is reduced."

Gold prices surged 55 dollars on the London Bullion Exchange to 834 dollars an ounce. New York crude oil surged 6.01 dollars to 97.16 dollars.

Meanwhile a rush for short-term Treasury bills, seen as one of the safest securities, pushed yields down to historic lows. The four-week T-bill yielded just 0.245 percent and the three-month bill 0.06 percent, the lowest levels since 1954.

The news of AIG's rescue was initially welcomed in Asian trade, but investors soon began wondering about the next victim and the underlying problems of the financial sector, which has been ravaged by the collapse of the US real estate sector.

"The overnight bailout of the US insurer AIG has reassured markets that some financial institutions are too big to be allowed to fail after all," said Capital Economics analyst Julian Jessop.

"Nonetheless, there will be more casualties in the financial sector -- if market conditions are now so bad that the giant AIG needs a government bailout, what about the smaller and weaker players?"

In other markets, Brazil's Bovespa plunged 6.74 percent and the Mexican Bolsa Mexicana de Valores sank 4.72 percent. Toronto's S&P/TSX index retreated 2.86 percent.

The turmoil spread to Russia, where markets were shut down amid heavy losses.

Regulators halted trading on both the RTS and the MICEX after they fell 6.39 percent and 3.09 percent respectively. The move came a day after Russian stocks suffered their worst drop since the 1998 financial crisis, with the RTS falling 11.47 percent Tuesday and the MICEX down 17.45 despite a one-hour suspension of trading on both markets.

The meltdown prompted Russia's central bank to slash reserve requirements for banks in a bid to restore confidence.

In Asia, an equities rally ran out of steam and some markets turned sharply lower on persistent worries over the health of US financial institutions.

Hong Kong closed down 3.6 percent while Shanghai lost 2.9 percent on concerns over the impact of the US financial turmoil on the Chinese economy.

Tokyo managed to buck the trend, adding 1.21 percent.

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