By Jonathan Stempel

In a sign of the severity of its predicament Lehman brought forward the release of "key strategic initiatives" and quarterly results by a week to 7:30 New York time (EDT) on Wednesday. Major Wall Street banks, including Goldman Sachs, issued statements saying they were still trading with the firm.

Facing what may be billions of dollars in additional write-downs, the bank has examined options from selling a stake to a Korean bank to spinning off its investment management unit, but they have yet to bear fruit.

"This has been going on for a while now, and people are worried about liquidity, survival," said Rose Grant, a portfolio manager at Eastern Investment Advisors in Boston, which invests $1.8 billion and has never owned Lehman shares.

The firm's woes raised the possibility of a Washington-sponsored rescue just a few days after a U.S. takeover of mortgage companies Fannie Mae and Freddie Mac and months after the Bear Stearns meltdown, which resulted in a fire sale brokered by the government. U.S. officials declined to comment.

The stock closed down $6.36 at $7.79 on the New York Stock Exchange, after touching $7.64, its lowest level since October 1998. The slide wiped out $4.4 billion in market value, and was a major factor in broad declines in major U.S. stock indexes. Prices of safe-haven U.S. Treasuries rose.

Lehman shares recovered some of the losses, pulling back to $8.35 in after-hours trading after it said it was bringing forward the announcement of the initiatives and results.

Investors are worried that Lehman Chief Executive Richard Fuld may fail to raise enough capital to keep the company operating as losses mount from soured mortgages and other toxic assets.

'BEAR STEARNS REDUX'

The bank has been reviewing options for the Neuberger & Berman asset management unit, one of its healthier businesses. Analysts have said Neuberger could fetch $7 billion to $8 billion in a sale, and expect a spin-off or disposal of much of its commercial real estate portfolio.

Another hoped-for option, the sale of a stake to Korea Development Bank, looked less likely after reports that talks on a sale had ended without a deal.

"It's Bear Stearns redux," said Greg Salvaggio, a currency trader at Tempus Consulting, referring to the collapse of the Wall Street investment bank in March.

Unlike Bear, which made senior executives available for interviews in the days leading up to its collapse, Lehman has declined several times to comment on its problems, and on Tuesday did so again.

Lehman said executives would talk after the release of the results on Wednesday.

The U.S. Federal Reserve and Securities and Exchange Commission declined to comment. A U.S. Treasury Department spokeswoman said officials stay in touch with Wall Street on a regular basis. NYSE Regulation spokesman Scott Peterson said the exchange was monitoring trading in Lehman shares closely.

In what looked like a concerted effort to boost investor confidence in Lehman, a slew of Wall Street firms, including Goldman and Citigroup Inc, put out statements saying they were still trading with the firm late on Tuesday afternoon.

'HEIGHTENED UNCERTAINTY'

Standard & Poor's said it may cut Lehman's "single-A" long-term credit rating, its fifth-lowest investment grade. It cited "heightened uncertainty" about the bank's ability to raise capital as its shares fall. It said a downgrade could be more than one notch.

The cost of protecting Lehman debt with credit default swaps rose to 490 basis points, or $490,000 annually for five years to protect $10 million of debt, from 327 basis points Monday, according to John Atkins, an analyst at IDEAglobal in New York.

"They do need to open up and really give some reassurance, show where the capital is, and what they are doing and that they are solid," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co, referring to Lehman. "There's no mercy on Wall Street once they lose confidence in you."

Shares of other U.S. financial companies heavily exposed to mortgages also fell on Tuesday. Insurer American International Group Inc slid 19 percent, and Washington Mutual Inc, the largest savings and loan, dropped 20 percent.

S&P cut its outlook on Washington Mutual's "BBB-minus" credit rating, which is one notch above "junk," to "negative."

Lehman had a second-quarter loss of $2.8 billion, or $5.14 per share. Analysts, on average, expect a third-quarter loss of $3.04 per share, according to Reuters Estimates.

'NO LONGER IN CONTROL'

Sean Egan, managing director at Egan-Jones Ratings Co in Haverford, Pennsylvania, said Lehman may have limited options to raise capital.

"There are relatively few parties who have the ability to move quickly to help shore up Lehman Brothers' credit quality," he said. "Unfortunately, Lehman has to move rapidly to calm counterparty concerns."

Prominent banking analyst Richard Bove at Ladenburg Thalmann & Co said a weekend management overhaul at Lehman, including departures of its fixed-income chief and a top international executive, signaled that talks on raising capital weren't going well.

"People simply made the decision that they didn't want to be anywhere near this company because management was no longer in control of what was in the best interest of shareholders," he said.

Lehman shares sank on Tuesday after Dow Jones Newswires reported that talks on a possible investment from Korea Development Bank broke down, citing the chairman of South Korea's top securities regulator, Jun Kwang-woo.

A spokesman for the Korean regulator denied the report, telling Reuters that Jun never made the statement.

The Dow article also quoted an unnamed government official as saying KDB had decided not to invest in Lehman.

(Additional reporting by Dena Aubin, Paritosh Bansal, Elinor Comlay, Joseph A. Giannone, Steven C. Johnson, Juan Lagorio and Richard Leong, Lucia Mutikani, Vivianne Rodrigues and Jonathan Spicer in New York; David Lawder and Rachelle Younglai in Washington, and Kim Yeon-hee in Seoul; Editing by John Wallace, Jeffrey Benkoe, Richard Chang, Gary Hill)