Goldman posts 70 percent profit loss in third-quarter

The cost of borrowing between banks surged as financing troubles piled up for U.S.-based American International Group and as markets faced the fallout from the failure of investment bank Lehman Brothers.

Concerns intensified that AIG, once the world's largest insurer by market value, could be the next victim after a ratings downgrade, causing a rout in stock markets already battered on Monday after the collapse of the talks.

Interbank lending rates jumped, with overnight dollar Libor rates fixed at 6.4375 percent compared with 3.10625 on Monday, hurting bank stocks further.

Heavyweight energy and mining shares also lost ground as prices for crude oil and metals fell amid worries that the financial crisis would hurt economic growth, reducing demand for commodities and hence revenue and earnings for sector companies.
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By 1140 GMT, the FTSEurofirst index of leading European shares was down 2.7 percent at 1,089.40 points, having earlier hit 1,088.40 points, its lowest since May 2005.
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The European benchmark index lost 3.6 percent on Monday after Lehman Brothers filed for bankruptcy protection.
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The troubles faced by Lehman, Wall Street bank Merrill Lynch , which is being taken over by Bank of America, and American International Group -- under pressure as credit rating agencies downgraded its debt -- weighed heavily on European financials.
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"It increases the uncertainty and that is poison for the markets," Dennis Nacken, capital markets analyst at Allianz Global Investors, told Reuters.
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European banks fell 5.4 percent.
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Shares in HBOS fell 32 percent, Dutch-Belgian financial group Fortis was down 14 percent, UBS lost 13 percent and Royal Bank of Scotland dropped 12.5 percent.
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"The capital ratios of many banks are already very tight and an additional 1-2 billion euro loss from a Lehman line might push certain banks into rights issue territory again," Dresdner Kleinwort said in a note, which did not single out any bank.
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"Very few banks have disclosed detailed exposures to Lehman and, faced with uncertainty, investors have sold the sector in block," Dresdner Kleinwort said.
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F&C Investments said speculation was building about which institutions would be the next to fail.
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"Markets are increasingly concerned about the stability of the financial system," F&C said.
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British bank Barclays was down 7.9 percent after confirming it was in talks about a possible acquisition of certain Lehman assets.