The FTSE 100 opened down almost 158 points today as fears over the collapse of Lehman Brothers outweighed the more positive news that bank of America will buy Merrill Lynch in a $50 billion (£27.89 billion) deal.

Bank shares fell sharply, despite the Bank of England promising to take “appropriate” measures to ease tension in money markets. The Bank said it “will be monitoring carefully, the conditions in sterling money markets and will take appropriate actions if necessary to stabilise those markets”.

HSBC was one of the early losers, despite saying it was not interested in buying an investment bank.

Barclays was among the hardest hit after it pulled out of talks to rescue Lehman . Its shares fell 28p at 323p. Analysts said the fact it considered doing a deal sent a bad message to investors.

Markets were also weighed down by bad news in the non-banking sector with Sainsbury's chief Justin King saying consumer sentiment was the worst he had ever seen and a report that pub closures are running at 36 a week, a third higher than last year's, because of falling consumer confidence and spiralling inflation. Sainsbury shares were down 14p at 361p.

With warnings that the Lehman bankruptcy could lead to an “immediate tsunami” on global markets, as investors try to untangle the bank's positions, focus swung to the firm's counterparties.

Lehman's court filing named top unsecured creditors as including Citigroup and Japan's Mizuho Financial Group.

The negative sentiment was worsened by news that insurance giant American International Group is seeking $40 billion in loans from the Federal Reserve. That failed to offset news that Bank of America would take over Merrill, seen as the next at-risk firm.

The seismic upheavals in Wall Street mean the New York scene, that once was dominated by five securities firms, has been reduced to two — Goldman Sachs and Morgan Stanley.

Asian stocks earlier tumbled ahead of the Lehman and Bank of America announcements with losses limited only because the Tokyo, South Korea, Hong Kong and China stock exchanges were closed.

In Sydney, the country's biggest investment bank, Macquarie, slumped 11% while infrastructure manager Babcock & Brown fell 15%.

“It's mayhem,” said Hans Kunnen, head of investment market research in Sydney at Colonial First State Global Management. “If you thought the US economy was slowing, that fear has been amplified, and that has implications for overall global economic activity.”