The Federal Reserve will extend troubled global insurer AIG $US85 billion in exchange for a nearly 80 percent stake.

The historic move is hoped to avoid the biggest corporate bankruptcy ever and follows a government bailout of mortgage lenders Freddie Mac and Fannie Mae just over a week ago.

The rescue plan is the latest development in a week of high drama on the world financial scene that included a deal to buy up profitable operations of bankrupt Lehman Bros, and central banks injecting liquidity into strained money markets.

In other developments:

• Stocks on Wall Street recovered despite the Federal Reserve policy committee left interest rates unchanged.

• Shares in AIG, which dropped more than 60 per cent on Monday, lost a further 40 per cent as speculation mounted for a government-backed bailout and hopes for a private-sector solution waned.

• Barclays Bank of the UK is said to be close to acquiring a large chunk of Lehman Bros’ US operations for just under $US2 billion.

• Goldman Sachs, the strongest of the Wall Street investment banks. posted a 70 per cent profit drop in the third quarter of $US845 million

• Central banks around the world pumped short-term cash into strained money markets for the second day in a row.

• Asian and European stock markets and currencies sustained heavy losses

From the opening bell on Wall Street, AIG stock lost nearly three-quarters of its value in the opening minutes of trading as bankruptcy fears rose if it doesn't secure about $75 billion in stop-gap financing by Wednesday.

The New York branch of the Federal Reserve, where the meetings related to the AIG situation were talking place, had no comment on the report of possible Fed involvement in a bailout.

An AIG bankruptcy would take the financial crisis to another level, given the company's size and wide reach. The New York-based company is used by many companies around the world to manage a range of risks, including exposure to investments in subprime mortgages.

Barclays, the UK's third-largest bank in terms of market value, is said to be close to buying Lehman's US broker-dealer unit a day after the parent company filed for Chapter 11 bankruptcy protection. Barclays had been in talks over the weekend to buy the entire firm before walking away because it couldn't obtain US government support for Lehman's $US85 billion in souring assets or backing for Lehman's balance sheet.

The New York Fed injected $US50 billion in reserves into the banking system and added another $US20 billion later. The European Central Bank injected €70 billion in one-day funds into euro-zone money markets, more than double its Monday injection of €30 billion.

The Bank of England offered £20 billion in extra two-day funds, atop Monday's £5 billion in extra three-day funds. Similar injections occurred in Switzerland and Japan.

In trading on Wall Street, stocks initially fell then recovered after Fed left its key rate target unchanged at 2 per cent.