Financial havoc wallops U.S. dollar and stocks

By Kevin Plumberg

HONG KONG (Reuters) - Stocks and the U.S. dollar fell sharply on Monday after Lehman Brothers filed for bankruptcy protection, sending safe-haven Treasury debt and gold prices soaring as the financial system bent under severe pressure.

U.S. stock market futures were down around 3 percent, pointing to sharply lower open, while major European markets were set for falls of between 3.5 to 4 percent.

Rapid-fire developments on Wall Street, only a week after the U.S. government bailed out Fannie Mae and Freddie Mac, left some analysts literally speechless and sent shockwaves through almost every asset class. The dollar plunged 1.9 percent against the yen, on track for its biggest decline since February 2007, as investors' willingness to take risks evaporated.

"It's a pure flight to quality right now," said Adam Donaldson, head debt strategist at Australia's Commonwealth Bank.

"The big concern is how Lehman and other banks unwind their credit default contracts," he added. "Nobody knows how that will play out."

The price of insurance against default on debt soared, pushing up the iTRAXX Asia ex Japan high-yield index, a measure of credit market stress, to match record highs reached in the run-up to Bear Stearns' collapse in March.

While a lack of confidence felled Lehman, a lack of short-term funding was hurting one of the world's largest insurers American International Group (AIG.N). The firm was asking the Federal Reserve for a bridge loan of $40 billion (22.1 billion pounds), according to the New York Times, an unprecedented move that further battered the dollar and knocked down two-year U.S. government debt yields to a five-month low.

ASIAN STOCKS TUMBLE