Asian stocks fell on Thursday, but recovered from sharp losses earlier in the day, amid worries that more companies could succumb to the financial crisis that forced the U.S. to bail out insurer American International Group Inc.

European stocks opened higher as Europe's major central banks banded together with counterparts in Japan, the U.S. and Canada to inject as much as $180 billion US into global money markets in a bid to stave off the growing crisis.

Hong Kong's Hang Seng Index, which was down more than seven per cent at one point, closed virtually flat at 17,632 points. Tokyo's Nikkei 225 index, also paring early losses, ended down 2.2 per cent to 11,489.30, a three-year low.

Investors were shaken by the U.S. Federal Reserve's $85 billion U.S. emergency loan to AIG, the huge U.S. insurer that lost billions in the risky business of insuring against bond defaults and became the latest victim of the historic financial turmoil that's engulfed Wall Street over the last year.

The crisis, a result of problems with souring mortgage debt and restricted credit, has already brought down Wall Street giants Lehman Brothers, Merrill Lynch and Bear Stearns. The two independent investment banks left standing — Morgan Stanley and Goldman Sachs Group — remained under scrutiny.

"A collapse of confidence"

"It's a complete collapse of confidence," said Francis Lun, general manager of Fulbright Securities Ltd in Hong Kong. "The financial crisis in the U.S. is hitting everyone, everyone is running for cover. If the largest insurance company can fail, than no one is safe."

But the move by major central banks boosted the confidence of some Asian investors, possibly contributing to the late-day recovery in some markets. Lloyds TSB PLC's 12.2 billion-pound ($21.85-billion US) deal to take over struggling HBOS PLC, Britain's biggest mortgage lender, also helped sentiment.

European stocks rose in early trading, with Britain's FTSE-100 up 1.3 per cent and Germany's DAX up 0.3 per cent.

Mitsuru Shimizu, deputy general manager at Cosmo Securities in Tokyo, said efforts by central banks to calm financial market jitters appeared to help restore confidence.

"It looks like the panic-type selling spurred by the financial market turmoil is beginning to calm down," Shimizu said.

In other markets, Australia's S&P/ASX200 index fell 2.4 per cent, South Korea's Kospi lost 2.3 per cent, and China's Shanghai benchmark dropped 1.7 per cent after earlier falling seven per cent.

The losses tracked U.S. markets, where the Dow Jones industrial average fell about 450 points Wednesday, or 4.06 per cent, to 10,609.66. In Toronto, TSX composite index closed down 349 points to 11,881, its lowest level in two years.

Attention on Wall Street on Thursday is expected to focus on the fate of Washington Mutual, the largest U.S. savings and loan institution, which has put itself up for auction as a way to avoid bankruptcy.

With files from the Associated Press