Lehman Brothers, the fourth-largest US investment bank, has filed for bankruptcy protection, dealing a blow to the fragile global financial system.
The news led to sharp falls in share prices around the world, and officials took measures to reassure markets.
Lehman had incurred losses of billions of dollars in the US mortgage market.
Merrill Lynch, also stung by the credit crunch, has agreed to be taken over by Bank of America, the latest twist in a dramatic turn of events on Wall Street.
US Treasury Secretary Henry Paulson said the US was "working through a difficult period in our financial markets right now as we work off some of the past excesses".
But he added: "The American people can remain confident in the soundness and resilience of our financial system."
However he warned that uncertainty remained and it was likely that there would be further "rough spots" ahead before the market was corrected.
Turmoil would continue in financial markets until the housing correction was completed, he added.
Mr Paulson said he was committed to working with regulators in the US and abroad, as well as policymakers in Congress to take the necessary steps "to maintain the stability and orderliness of our financial markets".
But he gave no details of what such steps might mean.
Earlier in the day President George W Bush said: "In the long term I am confident that our financial markets are flexible and resilient and can deal with these adjustments."