The benchmark NZSX-50 index is now down 3.5%, having fallen 112 points today to 3157.
The total value of the NZSX-50 when it closed yesterday was $38.3 billion. It currently stands at $37bn.
Across the Tasman, shares in Australia's major banks and insurers were pounded in morning trade as investors fled risky assets in response to Wall Street's four% plunge overnight.
This afternoon, the major lenders had dropped over three%, with National Australia Bank (NAB) falling to its lowest level in almost 12 years, down $1.62 ($NZ1.96) or 7.83% at $19.08.
Australia's largest investment bank, Macquarie Group, fell 17.42% or $5.91 to $28.02 after global ratings agency Standard & Poor's downgraded the bank's outlook from stable to negative.
Yesterday, the New Zealand sharemarket had staged a relief rally, following the $US85 billion ($NZ130 billion) US government bailout of giant insurer AIG.
The benchmark NZSX-50 index ended up 42.6 points, or 1.3%, at 3269.9, having fallen sharply 2.8% on Tuesday after Lehman Brothers filed for bankruptcy protection in the US and Merrill Lynch was forced to accept a takeover by Bank of America Corp.
Manic and increasingly desperate dealmaking has gripped Wall Street as shares of investment banks Morgan Stanley and Goldman Sachs plummeted amid more signs of distress in the global financial industry.
Morgan Stanley was discussing a merger with regional banking powerhouse Wachovia, the New York Times reported, while Washington Mutual, the country's largest savings bank, put itself up for sale, sources said.
British bank Lloyds TSB was reported to have agreed to buy rival HBOS to create a Stg28b ($NZ78b) mortgage company.
The BBC said HBOS, Britain's biggest home loan lender, would be bought for 232 pence per share, valuing it at over Stg12b. Both boards had agreed the all-share takeover.
The rescue of insurer AIG failed to calm a crisis of confidence in global markets overnight and banks were scared to lend to each other.
In the US, rattled investors worried about who could be the next victim of the global credit crisis.
Morgan Stanley shares sank 24.2% as investors worried whether it would survive as an independent investment bank in the current environment.
Goldman Sachs shares were down 13.9%.
"The fear is, 'Who is next?"' said John O'Brien, senior vice president at MKM Partners LLC in Cleveland.
The Dow Jones industrial average closed down 449.36 points, or 4.06%, to 10,609.66, its lowest level since November 2005. The fall was still smaller than the Dow's 504.48-point plunge on Monday (local time).
The S&P 500 fell 4.71% to 1156.39, its lowest level since May 2005 and its biggest%age drop since September 17, 2001, when the markets reopened after the September 11 attacks.
The Nasdaq also fell the most since September 17, 2001. It shed 109.05 points, or 4.94%, to 2098.85, its lowest level since August 2006.
The rescue of AIG was the latest in a string of bailouts, a bankruptcy on Wall Street, and central banks around the world flooding the financial system with money to prevent it from seizing up.
Strategists said the damage threatens to go beyond the financial services sector, hurting corporate profits and spreading panic among increasingly overstretched consumers.
The bank-to-bank cost of borrowing overnight dollars fell more than a%age point, but the premium paid for the greenback and sterling over three months swelled, fanning fears that the supply of credit might be drying up in the global financial system.
Investors scrambled for ultra low-risk investments, such as cash and gold.
Gold futures shot 9% higher in their biggest one-day%age gain since February 2000.
The $US70 rise in the benchmark US gold contract for December delivery was gold's biggest one-day rise in absolute terms since 1980. Spot gold rose more than 10% to $US866.10 an ounce by New York's last quote.
In the crude oil market, prices shot up $US6 a barrel, the largest one-day%age gain in three months, as a US government report showed nationwide energy inventories fell in the aftermath of two Gulf Coast hurricanes.
The gains followed oil's steepest two-day sell-off in four years as investors fled to safer havens like bonds and gold.
US crude oil prices settled at $US97.16 a barrel, up $US6.01, while London Brent crude oil settled at $US94.84 a barrel, up $US5.62.
The FTSEurofirst 300 index of top European shares ended down 1.95% at 1070.10 points. The benchmark has fallen more than 8% this week and is on track for its worst week in more than six years.
Asian stocks rose overnight in response to the AIG bailout, even as the cost of insurance against defaults soared and signs mounted that banks were hoarding US dollars.
Britain's benchmark share index lost 2.3% to hit its lowest close since mid-2005, as investors dumped financial stocks fearing more chaos from the credit crisis.
In Tokyo, the Nikkei average rose 1.2%, but that was from a three-year low hit the previous day.
