Lehman Brothers, the fourth-largest US investment bank, is on the brink of collapse after talks with potential buyers hit a dead end.

Weekend talks with Britain's Barclays Bank and the United States' Bank of America faltered after the potential buyers said they were not convinced that Lehman, which last week announced a loss of $3.9bn in just three months, would be a good buy for shareholders.

Some analysts believe a Lehman collapse could trigger a shake up of the entire US financial system which has been stuck in the economic doldrums since the mortgage crisis hit more than a year ago.

"The US financial system is finding the tectonic plates underneath its foundation are shifting like they have never shifted before," Peter Kenny, managing director at Knight Equity Markets in New Jersey, said.

"It's a new financial world on the verge of a complete reorganisation."

The end of bidding for Lehman prompted a rare emergency trading session on Sunday which market sources said was initiated by the US Federal Reserve with the aim of reducing risk associated with a potential bankruptcy filing by Lehman, possibly on Monday.

Turbulent market

Mark Grant, managing director of structured finance at Dallas-based Southwest Securities, said he was expecting a turbulent session when the US markets re-opened for business on Monday.

"No one has any idea about the credit quality of the assets in Lehman's portfolio," he said.

"The market is going to be spooked. People will be fearful and no one outside a very small group of people knows what Lehman going into liquidation will mean."

Grant said a forced sale or liquidation could "set off another round of write-downs globally".

Within hours of the collapsed Lehman talks, there were already reports of talks involving the takeover of Merrill Lynch & Co and the expected sale of assets by American International Group (AIG).

The lack of a government guarantee to resolve the Lehman crisis is the main reason Barclays decided to exit the negotiations, according to a person familiar with the talks.

Greenspan: More to come

So far this year, the government has bailed out Lehman rival Bear Stearns and mortgage lenders Freddie Mac and Fannie Mae.

Over the weekend Alan Greenspan, the former US Federal Reserve chairman, projected the failure of "other major financial firms" but added that this did not need to be a problem.

"It depends on how it is handled and how the liquidations take place," he said on US broadcaster ABC.

"And indeed we shouldn't try to protect every single institution. The ordinary course of financial change has winners and losers."