NEW YORK (Reuters) - Stocks are seen opening sharply lower at the start of the week after last ditch efforts to save investment bank Lehman Brothers appeared to have failed late Sunday.

The ongoing impact of the global credit crunch of the past year also saw reports of a bid for Merrill Lynch (MER.N: Quote, Profile, Research, Stock Buzz) by Bank of America (BAC.N: Quote, Profile, Research, Stock Buzz) and talk of asset sales by the world's largest insurer (AIG.N: Quote, Profile, Research, Stock Buzz).

U.S. stock index futures tumbled late on Sunday, pointing to a sharply lower Wall Street open on Monday on fears the meltdown in asset values in the U.S. banking system could impact the broader U.S. economy as credit is restricted further while U.S. house prices continue to fall.

The focus on Sunday had initially been on whether talks between regulators and Wall Street's top bankers could lead to the sale of Lehman Brothers Holdings (LEH.N: Quote, Profile, Research, Stock Buzz), which until recently was the fourth-largest U.S. investment bank.

But the emergency discussions about Lehman's future faltered, and the Wall Street Journal reported that American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz), left with deep losses on guarantees it wrote to cover mortgage-linked securities, is expected to sell off assets.

Adding to the already unusually heavy flow of corporate news for a Sunday, the New York Times also reported Bank of America Corp (BAC.N: Quote, Profile, Research, Stock Buzz) is in advanced talks to acquire Merrill Lynch & Co Inc (MER.N: Quote, Profile, Research, Stock Buzz) for at least $38.25 billion in stock, citing people briefed on the negotiations.

As with the collapse of investment bank Bear Stearns back in March that led to its purchase by JPMorgan Chase (JPM.N: Quote, Profile, Research, Stock Buzz), investors are braced for developments that could again reshape the U.S. financial landscape as fallout from the credit crisis escalates.

"It looks like it will be nasty tomorrow," said Andrew Brenner, co-head of structured products and emerging markets at MF Global in New York in a note to clients.

Lehman's woes underscore the severity of the credit crisis that began more than a year ago as the U.S. housing slump swelled losses stemming from soured mortgage investments.

"Investor sentiment is braced for the worst news possible," said John Kosar, market technician and president of Asbury Research in Chicago.

"When you have extreme circumstances like we're having now it's very hard to try to figure out what to do next."

Unease about Lehman's future kept investors anxious about the health of the U.S. financial system and weighed on financial shares on Friday, causing U.S. stocks to end little changed. For the week, the Dow rose 1.8 percent, the S&P 500 rose 0.8 percent and Nasdaq gained 0.2 percent. But even if the Lehman issue is resolved, attention is seen shifting to other financial firms.

Leading brokerage Merrill Lynch & Co Inc (MER.N: Quote, Profile, Research, Stock Buzz) and American International Group (AIG.N: Quote, Profile, Research, Stock Buzz), once the world's largest insurer by market capitalization, are among the other companies threatened by the credit maelstrom.

"What has to happen is some change in the mind-set. By that, I mean there has to be an idea that the housing sector is bottoming. I don't mean prices, I mean demand for houses and inventories," said Stanley Nabi, vice chairman at Silvercrest Asset Management Group in New York.

The U.S. Federal Reserve's next scheduled policy-setting meeting on Tuesday will also draw investor focus. While the Fed is widely expected to keep interest rates steady at 2.0 percent, investors will scrutinize the Fed's accompanying assessment of the economic outlook for clues about corporate profit prospects.

Additionally, the spotlight will fall on any Fed comments on the current financial market turmoil after the government's bailout of home finance giants Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) and Lehman's problems.

Aside from the Fed, Goldman Sachs Group (GS.N: Quote, Profile, Research, Stock Buzz) will report its quarterly earnings on Tuesday.

This week's calendar also features the release of key economic data, including the August Consumer Price Index on Tuesday.

Also high on the economic agenda is a report on August industrial production set for release on Monday, August housing starts on Wednesday and on Thursday: weekly jobless claims and a report on business activity in the Mid-Atlantic region by the Philadelphia Federal Reserve.

In other areas, Hurricane Ike was shaping up to be the biggest storms to hit Texas in nearly 50 years and could hammer insurers.

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By Chris Sanders and Ellis Mnyandu

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