U.S. Stocks Down Steeply At The Start On AIG-induced Anxiety

NEW YORK (MarketWatch) - U.S. stocks dived at Wednesday's start as investors questioned whether the government's rescue of American International Group Inc. would stop financial sector hemorrhaging and as home building tumbled again in August.

"The markets will be largely focused on the U.S. financial sector for further direction in currencies, rates and equities," said Rebeca Liu, a currency analyst at Wachovia Corp.

After an opening drop of more than 200 points, the Dow Jones Industrial Average was recently off 158.12 points to 10,900.9, with 27 of its 30 components trading lower.

AIG fronted the blue-chip declines, its stock falling 40% to $1.50 a share.

The government's takeover of AIG, made through an $85 billion loan, came late Tuesday after regulators acknowledged the company's failure would create havoc in the world's financial system. .

The S&P 500 declined 18.82 points, or 1.5%, to 1,194.8, while the Nasdaq Composite shed 31.36 points, or 1.4%, to stand at 2,176.54.

Barclays said it would pay $1.75 billion to buy the U.S. investment banking and capital markets operations of Lehman Brothers Holdings Inc. , with the deal needing approval of U.S. bankruptcy courts. .

Also weighing on equities, the Commerce Department estimated its count of new building permits for single-family homes fell to a 26-year low. .

The federal takeover of AIG triggered safe-haven buying of gold and other commodities, with gold futures climbing $6.2 to $786.70 an ounce on the New York Mercantile Exchange. .

Elsewhere on Nymex, crude-oil futures gained, recently up $2.48 at $93.63 a barrel.

In Asia, markets ended mixed, with the Hong Kong's Hang Seng Index falling 3.6% to end at 17,637.19, its lowest level since October 2006. .

On Tuesday, U.S. stock indexes climbed on reports of an imminent AIG rescue, with the market largely bypassing the Fed's decision to leave its benchmark lending rate unchanged at 2%. Read The Fed.

By Kate Gibson