Australian shares fell 2.9 percent in early trade. Japan's Nikkei was down 2.7 percent, the Republic of Korea's KOSPI was off 2.2 percent, and Hong Kong's Hang Seng was down 3.6 percent in early trading.

Earlier, the Dow Jones industrials tumbled 449 points - its second worst day of the year, but only the second worst day this week. The Nasdaq and the S&P also suffered drops of more than 4 percent.

The selloff comes in the wake of investment bank Lehman Brothers' bankruptcy, Merrill Lynch's sale to Bank of America, and the US government announcing an US$85 billion plan to bail out insurance giant American International Group (AIG).

The fallout from the housing and credit market collapse "ripples through the entire financial industry and is stretching to other industries," Kelli Hill, Portfolio Manager at Ashfield Capital Partners told CNNMoney.

The remaining two Wall Street investment banks were hit particularly hard with Morgan Stanley down 29 percent and Goldman Sachs down 21 percent.

British bank Barclays said it had reached a deal on Wednesday to purchase key units of US investment bank Lehman Brothers for US$1.75 billion, as turbulent global markets continued to worry investors.

The deal came just two days after Barclays walked away from talks to buy the beleaguered financial institution in its entirety.

Barclays will also purchase Lehman's New York headquarters and two data centers in New Jersey at their current market value estimated at US$1.5 billion.