By Dan Wilchins

Wall Street's fourth-largest investment bank also reported a much-larger-than-expected third-quarter loss of $3.93 billion, hurt by $5.6 billion of net write-downs.

"This is an extraordinary time for our industry, and one of the toughest periods in the firm's history," Chief Executive Richard Fuld said in a statement.

Lehman shares erased early gains that pushed them above $10. The shares, which fell 45 percent on Tuesday, were down 49 cents at $7.30 in pre-market trading as the company failed to announce a deal to sell its asset management business.

"What you are dealing with is a confidence issue," said Doug Roberts, chief investment strategist at Channel Capital Research in Shrewsbury, New Jersey, "There is still an underlying level of uncertainty as to what Lehman's future is."

Lehman said it has reduced exposure to toxic assets, including cutting its residential mortgage exposure by nearly half, and slashed its annual dividend to 5 cents per share from 68 cents.

Lehman said it intends to sell about 55 percent of a portion of its investment management unit, including Neuberger Berman asset management and the private equity and wealth management businesses. It said it is in "advanced discussions with a number of potential partners" for such a sale.

The company also said it intends to spin off $25 billion to $30 billion of its commercial real estate assets into a separate, publicly traded company.

Lehman said its third-quarter net loss applicable to common shareholders was $4.09 billion, or $5.92 per share. Net revenue was negative $2.9 billion, reflecting the write-downs.

Analysts' average forecast was a loss of $3.43 per share on revenue of $88 million, according to Reuters Estimates.

Selling the investment management division is designed to boost the company's capital levels; spinning off commercial real estate assets is meant to reduce the toxic investments that have reduced Lehman's market value by more than $40 billion since February 2007.

Before Wednesday, Lehman had already taken $7 billion in credit-related write-downs and losses since the start of the global credit crisis.

"The losses from mortgages have overwhelmed the capital at Lehman and the steps required, including the sale of Neuberger, are really quite a drastic turnaround," said Thomas Russo, a principal at Gardner, Russo & Gardner in Lancaster, Pennsylvania.

Facing what may be billions of dollars in additional write-downs, the bank had examined options from selling a stake to a Korean bank to spinning off the investment management unit, but investors have been frustrated at a lack of progress.

World stocks fell toward two-year lows on Wednesday as the problems faced by Lehman stoked concern that banks are struggling to rebuild capital and financial markets remain brittle. The yen trimmed losses, while bonds remained in red.

In what looked like a concerted effort to boost investor confidence in Lehman, a slew of major banks, including Citigroup Inc and Goldman Sachs Group Inc , said they were still trading with the firm late Tuesday afternoon.

(Additional reporting by Sweta Singh in Bangalore, Kim Yeon-hee and Marie-France Han in Seoul, Steve Slater and Natsuko Waki in London, Blaise Robinson in Paris; Editing by Lincoln Feast, Erica Billingham and John Wallace)