But then, in the afternoon, the market pulled itself together and regained some of its earlier losses.

In the morning, the benchmark S&P/ASX200 index fell as much as 3.5pc, or 164.5 points, to 4557.7 in early trading.

As the day progressed, however, the market started recovering, as the graph shows.

At the close, the S&P/ASX 200 index was down 2.4pc for the day, or 114.9 points, to 4607.3.

Wall Street had plunged more than 4pc overnight (see separate story) after the US government rescued insurance behemoth American International Group for $107 billion dollars.

James McGlew, senior dealer at Argonaut Securities, said: ''We're getting to the capitulation stage. People are just lining up and throwing the baby out with the bathwater.

''I went through the 1987 crash and you need to get to a point where the fear flushes the market out.''

However, Mr McGlew said the market still had room to lose another 400 points before bottoming out.

When the market eventually turns around, the weakness from the banking sector means it's not going to bounce straight back to 5000, he said.

There are, nonetheless, buying opportunities arising in companies with good, transparent balance sheets, he said.

The financial sector has been in the cross hairs of investors, with the big investment banks losing more than a fifth of their market cap.

Macquarie Bank was down as much as 21.8pc, or $7.03, to $26.90 in early trading, and Babcock & Brown lost 21pc, or 20 cents, to 72 cents.

• ANZ Bank lost as much as 5pc, or 80 cents, to $15.20.

• The Commonwealth Bank lost 4.8pc, or $1.98, to $39.12.

• NAB lost 10.1pc, or $2.10, to $18.60.

• Westpac lost 4.5pc, or $1.05, to $21.96.

• St George lost pc, or $1.20, to $28.95 and

• Suncorp Metway lost as much as 19.3pc, or $1.71, to $7.15.

''It's pretty savage,'' said Lisa Jarvis of ABM Amro Morgans. ''You'd have to say there's a bit of panic with concern for potential exposures to this off-shore crisis.''