(By Salman - iStockAnalyst Writer)US Stocks retreated sharply on Monday as Lehman Brothers (LEH) filed for a record Bankruptcy while leading insurer American International Group Inc. (AIG) struggled to raise capital.

The Dow Jones Industrial Average plunged 504.48 (-4.4%), to 10,917.51. The Nasdaq Composite Index fell 81.36 points (-3.60%) to 2,179.91. The S&P 500 Index lost 59.01 points (-4.7%), to 1,192.69. All but one of the Dow's 30 components finished in negative, with the Coca-Cola Co.(KO) being the sole stock to settle the day in green. Financials and Energy shares were the chief laggards. Today's fall was the worst for market since September 2001 Twin Tower terrorist attacks.

Lehman Brothers Holdings Inc. the 158-year-old Wall Street investment bank filed for Chapter 11 bankruptcy protection. The filing shows that it has more than 100,000 creditors, with total debts of $613 billion against total assets of $639 billion. Lehman was forced into bankruptcy after talks with Barclays Plc and Bank of America Corp. broke down over the weekend as Federal authorities apparently declined to provide financial backup to them. According to latest reports, Lehman Brothers Holdings Inc is likely to sell some of its units "very soon". Though no official announcement has been made, private- equity bidders including Bain Capital LLC, Clayton Dubilier & Rice Inc. and Hellman & Friedman LLC have emerged as preferred candidate for Lehman's investment-management unit. Shares of Lehman plunged by 94.3% to 21 cents a share.

AIG scrambled to raise capital in order to avoid rating downgrade that may very well threaten its survival. According to reports, Morgan Stanley (MS) has been hired by the Fed to advise on AIG's options and the potential role of the government in assessing systemic risk in the market. However Treasury Secretary Henry Paulson made it clear during a press conference on Monday afternoon that no government money would be involved in any AIG solution. The Fed has instead asked Goldman Sachs (GS) and J.P. Morgan Chase (JPM) to lead a lending facility for AIG of $70 billion to $75 billion, the Wall Street Journal reported on its Web site late Monday. In case of a rating downgrade the insurer may have to post billions of dollars in collateral to support credit-derivatives positions. The downgrades may also trigger a mass flight of clients. Shares of AIG dropped 61% to close at $4.76.

Meanwhile, Merrill Lynch & Co.(MER) agreed to be taken over by Bank of America (BAC) in an all-stock deal that is estimated to be worth $50 billion. Merrill was up 0.1 percent to $17.06, at the end of day. Bank of America declined 21.3%.

Shares of other financials also suffered losses. Shares of troubled lender Washington Mutual (WM) plunged 26.7%.Standard & Poor's lowered the bank's credit rating to junk after the market close. Wachovia plummeted 25%. Goldman dropped 12.1%, while Morgan Stanley plummeted 13.5%. Citigroup Inc.(C) and American Express Co. (AXP) retreated 15% and 8.9% respectively.

Energy Stocks also took the beating. Sunoco Inc.(SUN), which fell 20.2% was the biggest loser amongst the energy stocks. Chevron Corp. (CVX) dropped 4.9% to $80.09, and Valero Energy Corp.(VLO) declined 13% to $31.19.

The S&P Retail Index dropped 2.5% to 396 points. Home Depot (HD) lost 1% of its value, while Lowe's (LOW) fell 3.5%.

Tech stocks were also down. Best Buy Co. Inc. (BBY) shares fell 79 cents (-1.8%) to $43.70 after the nation's largest electronics retailer said it would acquire digital music service company Napster Inc.(NAPS). Dell Inc. (DELL) was down 5.5% , Microsoft Corp. (MSFT) retreated 2.9%, Intel Corp. (INTC) fell 4.05% and Cisco Systems Inc. (CSCO) shares fell $1.64, or 3.5%. Apple Inc. (AAPL) lost $8.58 a share, or almost 6%, to fall to $140.36.

Among other stocks, construction equipment maker Caterpillar Inc.(CAT), settled down 3.4% to $63.21.GE, maker of power-plant turbines and jet engines, was down 8.04%.

On the front of economic data, Fed reported that U.S. industrial output fell 1.1% in August, the biggest drop since 2005.Separately, the New York Federal Reserve Bank reported manufacturing activity in the region slowed earlier in September, with the Empire State index falling to negative 7.4 in September from 2.8 in August.
European Stocks too felt the heat on Monday. UK FTSE lost 3.92% while German DAX and French CAC retreated 2.74% and 3.78% respectively. Asian indices Taipei and Bombay Stock Exchange too closed deep in red.

With Hurricane Ike sparing key refineries in Gulf of Mexico, Oil futures dropped to a seven-month low, falling $5.47 to close at $95.71 a barrel on NYMEX.