RPT-GLOBAL MARKETS-Financial havoc wallops US dollar and stocks

* Investors flee for safety after Lehman files for Chapter 11

* High-grade debt, gold, yen in demand on bank industry storm

* Focus turns to Fed policy decision on Tuesday (Repeats to additional subscribers with no change to text) (Updates prices, details)

By Kevin Plumberg

HONG KONG, Sept 15 (Reuters) - Stocks and the U.S. dollar fell sharply on Monday after Lehman Brothers filed for bankruptcy protection, sending safe-haven Treasury debt and gold prices soaring as the financial system bent under severe pressure.

U.S. stock market futures SPc2 DJc2 NDc2 were down around 3 percent, pointing to sharply lower open, while major European markets were set for falls of between 3.5 to 4 percent STXEc1 FDXc1 FCEc1.

Rapid-fire developments on Wall Street, only a week after the U.S. government bailed out Fannie Mae and Freddie Mac, left some analysts literally speechless and sent shockwaves through almost every asset class. The dollar plunged 1.9 percent against the yen, on track for its biggest decline since February 2007, as investors' willingness to take risks evaporated. [ID:nLF649266]

"It's a pure flight to quality right now," said Adam Donaldson, head debt strategist at Australia's Commonwealth Bank.

"The big concern is how Lehman and other banks unwind their credit default contracts," he added. "Nobody knows how that will play out."

The price of insurance against default on debt soared, pushing up the iTRAXX Asia ex Japan high-yield index ITAHY5Y=IE, a measure of credit market stress, to match record highs reached in the runup to Bear Stearns' collapse in March.

While a lack of confidence felled Lehman, a lack of short-term funding was hurting one of the world's largest insurers American International Group Inc (AIG.N). The firm was asking the Federal Reserve for a bridge loan of $40 billion, according to the New York Times, an unprecedented move that further battered the dollar and knocked down two-year U.S. government debt yields to a five-month low.

For more stories on Lehman, click on [ID:nN13574113]

ASIAN STOCKS TUMBLE

Stock markets in Australia, Singapore and Taiwan all dropped 3 to 4 percent, Indian stocks .BSESN fell 5 percent.

Holidays in most major Asian markets kept volume thin though price action belied a desire to seek safety first and ask questions later.

"The exact ramifications of the liquidation process and the unwinding of positions pertaining to the Lehman situation remain unclear. Hence, over the next 48 hours at least, financial markets are likely to be volatile and tense," said economists with United Overseas Bank in Singapore in a note.