The evolving credit crisis wreaking havoc on financial markets around the world deepened yesterday as investment bank Lehman Brothers declared bankruptcy, brokerage Merrill Lynch was taken over by Bank of America and massive insurer AIG sought emergency funding to shore up its balance sheet.

Stock markets tumbled more than 500 points yesterday on news of the financial storm that hit Sunday.

The ripple effects of what is being called the worst financial crisis in this country since the Great Depression could have a profound impact on individual investors based on the adage that when Wall Street sneezes Main Street catches a cold.

The falling fortunes of some of the world's biggest investment banks could make a tense environment even worse. "It will likely cause even more tightening of credit by banks," said Robert Dye, a senior economist at PNC Financial Services.

In addition, "There probably isn't a person who has a 401(k) plan that doesn't have at least some exposure to AIG," said Michael Kresh, president and chief investment officer of M.D. Kresh Financial Services, Inc., in Islandia, N.Y.

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"With that company being so highly regarded, yet falling 60 percent in the last few days, no institutional investor or mutual fund likely sold their position before the very significant fall."

American International Group Inc., the largest insurance company in the world, as ranked by assets and one of 30 stocks that make up the Dow Jones Industrial Average, fell $7.38 or about 60 percent, to $4.76 yesterday, as investors worried that its debt would be downgraded by credit rating agencies.

National Union Fire Insurance Company, a subsidiary of AIG that is located Downtown, could be affected by the restructuring. Pete Tulupman, an AIG spokesman in New York, said the company was evaluating its alternatives and could not comment on the local impact.

Officials with the U.S. Treasury Department and the Federal Reserve met yesterday with representatives of the insurer, but the government is not considering offering a bridge loan.

"What is going on right now in New York has got nothing to do with any bridge loan from the government," said Treasury Secretary Henry Paulson. "What's going on in New York is a private-sector effort, again, focused on dealing with an important issue that's, I think, important for the financial system to work on right now."

The Federal Reserve had not been expected to make a rate cut at its regularly scheduled meeting which starts today, but the weekend's events may change that. Financial analysts are now predicting the central bank will lower the interest rate that banks charge each other to borrow money overnight.

"The odds of a Fed rate cut have gone up," Mr. Dye said. "I would not be surprised to see a 25 basis point drop. It will likely be a symbolic move to help restore confidence in the financial markets."

Credit markets typically react to a rising or falling federal funds rate by adjusting market rates accordingly. That means savers will likely earn less interest income from fixed investments while borrowers will end up paying less for mortgages and other types of loans.

Consumers may, however, find it tougher to get mortgages and car loans, while businesses have to work harder to get credit as banks tighten up lending in the wake of turbulence caused by the collapse of Wall Street's marquee firms, said Michael Cohn, chief investment strategist for Atlantis Asset Management in New York.

"The marginal homebuyer will find it even more difficult than before," said Tom Donlan, editorial page editor for financial publication Barron's and the author of "A World of Wealth."

Stock markets were in full retreat yesterday stemming from the historic upheaval on Wall Street. The Dow Jones industrial average fell 504.48 points, the Nasdaq dropped 81.36 points and S&P 500 fell 59.01 points. Locally, the Post-Gazette/Bloomberg index, which measures the performance of Pittsburgh-area companies, shed 15.63 points .

"People have already seen drops in their 401(k)s, savings and other investment accounts," said Bruce Fenton, president of Atlantic Financial in Boston. "Continued weakness in the market can lead to continued drops in their portfolios."

Robert Hapanowicz, president of Hapanowicz & Associates, Downtown, was more upbeat.

"We think the financial issues, though severe, are being resolved," he said. "Although it's pretty severe, these are normal events in the business cycle."

He compared the financial sector with the technology stock bust eight years ago.

"We think all this is inevitably positive," Mr. Hapanowicz said. "In the short-term, it is shaking out the players who took on too much risk or weren't careful. Capitalism works."