North American stock markets moved sharply lower Wednesday as investors absorbed the news of the U.S. Federal Reserve's nationalization of insurer American International Group, while still reeling from the disappearance of two huge investment banks earlier in the week.

Toronto's TSX composite index closed down 349 points to 11,881, its lowest level in two years. In New York, the Dow Jones lost 449 points or four per cent while the Nasdaq fell 109 points.

The Fed moved Tuesday evening to provide an $85-billion US loan to New York-based AIG in exchange for an 80 per cent stake in the company, which is facing billions in losses on its insurance against debt defaults.

The Fed said it acted because a disorderly failure of the world's largest insurance company could hurt the already delicate financial markets and the global economy.

Shares of AIG fell $1.70 US or 45 per cent, closing at $2.05

The U.S. government now is reported to be trying to organize a bank rescue of Washington Mutual Inc., the largest savings and loan company in the U.S.

Morgan Stanley — one of the last two big independent investment banks remaining on Wall Street — saw its shares fall $6.95 US, or 24 per cent, to $21.75 after reporting a better-than-expected seven per cent decline in third-quarter profit to $1.43 billion US. Morgan Stanley insisted it remains solid.

Toronto's financial sector fell two per cent, with Manulife Financial down $2.24, or six per cent, to $33.76 Cdn after the insurer disclosed it had an $800-million-plus exposure to AIG, Washington Mutual and bankrupt Lehman Brothers. The exposure is primarily fixed-income investments in the firms and their derivatives, both of which could potentially lose part or all of their value

Shares of Sun Life Financial slid $3.14, or eight per cent, to $35.77 after the insurer announced that it held $315 million of AIG's corporate bonds. Earlier in the week, Sun Life estimated it had $349 million worth of investments with Lehman Brothers.

Kingsway Financial Services shares were down 48 cents US, or over six per cent, to $6.76 on the NYSE after the Toronto-based automobile and truck insurer disclosed it had about $30 million of fixed-income investments in subsidiaries of AIG and $17 million of bond investments in Lehman Brothers.

Finance Minister Jim Flaherty said Wednesday that Canadians have nothing to fear as the chaos in financial markets continues south of the border.

"We get a lot of American news in Canada and I think sometimes Canadians understandably get very concerned about problems that are actually primarily taking place outside of our country," Flaherty said during a fundraising event in Winnipeg.

"We have strong economic fundamentals. We've had a government that's been prudent."

Flaherty says his government anticipated turmoil in the markets a year ago and the crisis this week is nothing new.

Overseas, Japan's Nikkei stock average rose 1.2 per cent after AIG's rescue, but Hong Kong's Hang Seng index lost 3.6 per cent. South Korea's Kospi climbed 2.7 per cent and Taiwan's benchmark was up 0.8 per cent.

In Europe, markets were all down, with Britain's FTSE 100 losing 2.25 per cent, Germany's DAX shedding 1.75 per cent and the French CAC-40 off 2.14 per cent.

With files from the Associated Press