Also read: ECB injects 70 billion euros into money market

and: Global credit crunch spells uncertainty for Airbus

Watch our programme 'Top Story' on the Wall Street meltdown

Investors throughout the world Wednesday welcomed the news of the US government bailout of cash-strapped insurance giant AIG. But it didn’t prove enough to appease Wall Street, whose main indexes plunged for a third straight day.

The Dow Jones Industrial average slid 453 points or 4.1 percent at the close.

That volatility is partly due to reports that HBOS, the biggest mortgage lender in the UK, engaged in merger talks with Lloyds TSB. HBOS shares fell 4.95 percent to 173 pence Wednesday while Lloyds TSB jumped 10.01 percent to 307.75 pence.

According to British media reports, details of HBOS' takeover by Llyods TSB were being finalized late Wednesday night.

Uncertainty also kept European stocks on a downward slope Wednesday.  At close,  trading, indexes in London, Paris and Frankfurt were falling. Worst hit was London, where the FTSE 100 index tumbled 2.25 percent to 4,912.40 points.

The Fed, AIG’s last chance

Unlike US investment bank Lehman Brothers, which for lack of a buyer, was forced to file for bankruptcy on Monday, AIG was able to get the US government’s help in last resort.

The Federal Reserve (Fed) granted an $85 billion loan to AIG to stave off bankruptcy in exchange for a 79.9 percent stake in the company. AIG shares went on a roller-coaster ride Tuesday, eventually closing down 21 percent after a 61-percent plunge at Wall Street on Monday.

The Fed defended its decision to grant an emergency loan to AIG and not to Lehman on the grounds that preventing the bankruptcy of a group five times larger than Lehman was paramount. The authorities feared the effects of AIG’s collapse on world money markets.

But at a time when liquidities are drying out and banks are increasingly reluctant to lend each other money, the Fed was forced to act quickly and wait till AIG took a nosedive. The White House hailed the rescue operation.

Central Banks stage rescue operations

Rescue loans are for central banks a useful tool to try and contain the risk of a credit-crunch, which slows down growth and consumption.

In the US, the Fed has injected 120 billion euros since the beginning of the week while the European Central Bank released 100 billion euros over the last two days. The Australian, Japanese and Indian central banks also rushed to the rescue.

But the Fed still has one card up its sleeve. It has not changed its interest rate – currently at 2%. It could decide to modify it later, if the crisis worsens.