Al Jazeera's John Terrett in New York said the mood on Wall Street was one of "shock".
"It's a new financial world on the verge of a complete reorganisation," Peter Kenny, the managing director at Knight Equity Markets in New Jersey, US, said.
"The US financial system is finding the tectonic plates underneath its foundation are shifting like they have never shifted before."
"This is a defining moment for world economies, particularly for the United States," Andrew Critchlow, the managing editor for Dow Jones Middle East, said.
"The ordinary course of financial change has winners and losers"
Alan Greenspan, former US Federal Reserve chairman
"The impact is going to be quite profound.
"People who were around in the 1920s [during] the Great Depression, that stuck with them ... this can only be described in similar terms."
European stocks closed at their lowest level for two months while in New York, Wall Street had its worst day in six years.
The Dow Jones index lost more than 500 points, or 4.42 per cent, with AIG down nearly 61 per cent, and Bank of America down 21.3 per cent.
London's FTSE share index dropped to close nearly four per cent, or 212 points, lower. The CAC-40 in Paris ended down by 164 points, or 3.8 per cent, while Frankfurt's DAX index closed 171, or 2.7 per cent, lower.
Asian markets dropped by up to 3.6 per cent.
Bank negotiations falter
Lehman's collapse came after talks with Britain's Barclays Bank and the Bank of America over the weekend faltered after the potential buyers said they were not convinced the US bank, which last week announced a loss of $3.9bn in just three months, would be a good buy for shareholders.
The British arm of the bank was placed under the administration of accountants from PriceWaterhouseCoopers on Monday to defend itself from creditors.
Within hours of the collapse of the talks, details emerged of a deal by Bank of America to takeover Merrill Lynch - the US' third-largest investment firm.
Al Jazeera's Matthew Moore, at the London Stock Exchange, said: "Henry Paulson, the US treasury secretary, was adamant that this time around, no money would be spent on bailing out yet another investment bank.
"Just over a week ago they put in billions to prop up Fannie Mae and Freddie Mac, but those are two crucial mortgage giants which also have a bearing on how foreign investors treat the United States and how they treat the dollar."
'Winners and losers'
Alan Greenspan, the former US Federal Reserve chairman, over the weekend projected the failure of "other major financial firms".
He said: "... we shouldn't try to protect every single institution.
"The ordinary course of financial change has winners and losers.
"It depends on how it is handled and how the liquidations take place," he said on US broadcaster ABC.
So far this year, the US government has bailed out mortgage giants Freddie Mac and Fannie Mae, and saved Lehman rival Bear Stearns from going under by extending it cheap loans and allowing its forced sale to another rival, JPMorgan Chase.