Washington - As a mammoth bankruptcy and a surprise takeover shook the US financial industry, two Wall Street stalwarts were under pressure from the federal government to help bail out yet another major firm.

The US Federal Reserve has asked Goldman Sachs Group Inc and JP Morgan Chase & Co - among the few large finance firms still in the black - to provide up to 75 billion dollars in short-term loans help prop up insurance conglomerate American International Group Inc (AIG), The Wall Street Journal reported Monday.

The Journal cited unnamed sources close to the situation in the report on its website. The fund would provide short-term financing until AIG can sell off assets or arrange other financing.

Shares in AIG, the country's largest insurer by assets, plunged by more than 60 per cent Monday in New York as it fought to raise capital and avoid a credit downgrade by ratings agency.

AIG's troubles emerged just as the venerable Lehman Brothers Holdings, the country's fourth largest investment bank, declared the largest bankruptcy in US history before Monday's opening bell on Wall Street.

Another shoe dropped with the revelation late Sunday that Bank of America was buying the troubled stock brokerage and investment bank Merrill Lynch for 50 billion dollars in stock.

AIG had originally turned to the Federal Reserve for a 40-billion- dollar bridge loan to stay afloat while it raised the needed capital, reports said.

But the US central bank said no, having already pledged in recent months to spend up to 200 billion dollars of taxpayer money to help rescue the government-chartered Fannie Mae and Freddie Mac mortgage underwriters and another troubled investment banking firm, Bear Stearns.

Also riding to AIG's rescue was New York state, where Governor David Patterson said that his administration was working on a plan to allow AIG to borrow against 20 billion dollars in assets by easing some state insurance regulations.

A record rate of home foreclosures has severely undermined Wall Street's market for mortgage-backed securities. Seeking higher returns during the long US housing price boom, many banks took on securities based on higher-risk mortgage categories, only to see the investments evaporate when the housing bubble burst.

Similarly, AIG got involved in selling so-called credit-default swaps - contracts it sold to protect debt investments.

As the debt risk in mortgage securities soared, company chief Robert Willumstad conceded last month it had sold the swap instruments too cheaply compared to the real risks, which have now been exposed.

Bank of America chief Kenneth Lewis noted in an interview with business news channel CNBC that a crisis at AIG "would be a much bigger problem" than any other on what some analysts were calling "Black Monday."

Any moves by JP Morgan Chase, Goldman Sachs and the state of New York were seen as life-support until AIG can sell off some of its assets and regain firm footing.

AIG's assets include its consumer lender, American General Finance, a stake in the reinsurer Transatlantic Holdings Inc and an aircraft leasing unit International Lease Finance Corp. (dpa)