US investment bank giant Lehman Brothers has filed for bankruptcy protection after a rescue package failed to emerge.

Stock markets in Europe and Asia dropped sharply and the dollar tumbled against the euro and the yen as Lehman’s failure raised fears about the strength of the global financial system.

Lehman, the fourth-largest investment bank in the US, revealed last week it had lost $4 billion (£2.3 billion) in the third quarter with shares prices falling by up to 45 per cent in one day.

The bank, stung by write-downs on real estate investments, had hoped to be bought out by Bank of America or Barclays.

But Bank of America opted to buy Merrill Lynch for $44 billion (£24.4 billion), leaving Lehman Bros with no choice but to file for chapter 11 bankruptcy.

Lehman Bros, which said its subsidiaries and broker-deal subsidiaries were not affected by the action, said in a statement: “Customers of Lehman Brothers, including customers of its wholly owned subsidiary, Neuberger Berman Holdings, LLC, may continue to trade or take other actions with respect to their accounts.”

Company bosses explained that the move had been taken to “protect assets and maximise value” and that they were now looking at selling their broker-dealer operations.