LONDON, Sept 16 (Reuters) - European shares fell sharply early on Tuesday as turmoil in financials continued to hurt global equities, with insurers hit by a debt downgrade for American International Group (AIG.N: Quote, Profile, Research, Stock Buzz).
The FTSEurofirst index of leading European shares was down 1.7 percent, adding to a 3.6 percent slide on Monday after Lehman Brothers (LEH.N: Quote, Profile, Research, Stock Buzz) filed for bankruptcy protection.
The DJ Stoxx European insurer index was down 2.7 percent. Allianz (ALVG.DE: Quote, Profile, Research, Stock Buzz) and AXA (AXAF.PA: Quote, Profile, Research, Stock Buzz) fell 3.6 percent, while Prudential PRU.l fell 4.7 percent.
"There's a smell of cordite in the air. It's like the day after the explosion. People are still extremely nervous. They're wondering what happens next," said Justin Urquhart Stewart, investment director at Seven Investment Management.
"Investors are looking at what other companies have weak balance sheets. Now we need a bit of leadership from the central banks and the regulators," he said.
The U.S. Federal Reserve announces its rate decision at 1815 GMT. Fed fund futures point to an 86 percent chance of a 25-basis point rate cut.
Tokyo's Nikkei share average .N225 dropped 4.95 percent to its lowest in three years. Markets in Japan, South Korea, China and Hong Kong had been closed on Monday, and quickly followed the sell-off in New York.
Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz) will report third-quarter earnings later in the session.
Across Europe, Britain's FTSE 100 .FTSE, Germany's DAX .GDAXI and France's CAC 40 .FCHI were down between 1.6 and 1.8 percent.
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