SHARES in the Edinburgh-based Royal Bank of Scotland were down 40% at one point this morning following yesterday's market-wide slump.
RBS was the biggest victim on another day of turmoil for banks amid mounting speculation that the Government is set to spend billions on a taxpayer-funded rescue of the ailing sector.
There were also big falls for HBOS, Barclays and Lloyds TSB following crisis talks with Chancellor Alistair Darling last night.
But in an attempt to calm market nerves, RBS said: "Contrary to press speculation, RBS did not make a request to Government for capital."
Meanwhile, Iceland nationalised its second-biggest bank Landsbanki – leaving UK savers in limbo as its Icesave online website was frozen.
The wider FTSE 100 Index was 2% higher after yesterday's 7.8% slump – the biggest since Black Monday in October 1987 – as commodities bounced back slightly from the fall and oil prices rose.
But attention was firmly focused on banks, with RBS – also downgraded by investment ratings agency Standard & Poor's – later down 22% after its denial.
The bank's stock slumped after Sir Fred Goodwin and his rival bosses at Barclays and Lloyds TSB met Chancellor Alistair Darling last night – with a possible capital injection for the sector reportedly on the agenda.
The concerns caused a fresh spike in money markets as fearful banks refused to lend to each other.
The overnight lending rate, which should be virtually the same as the official 5% base rate in normal conditions, jumped more than 0.75% to 5.84%. Three month rates – used to price mortgages – widened to 6.28%
Alongside RBS's falls, HBOS was down 14% and Lloyds TSB 7% lower.
Barclays also registered big losses but recovered slightly to 4% down after denying it had called for fresh capital.
A spokeswoman for Lloyds TSB refused to comment on whether any discussions were taking place with the Government.
"We never comment on any discussions that may or may not have taken place with the Government," she said.
The banks at the meeting called for the Chancellor to act quickly but Mr Darling did not have a fully-prepared rescue plan, the BBC said.
Bank of England Governor Mervyn King and the new chairman of the Financial Services Authority, Lord Turner, were also at the meeting, although the Treasury declined to comment.
London's leading shares started today's trading with some solid gains, but the Footsie lost its momentum amid the banking sector woes.
They deepened in Iceland today, where the Government stepped in to save another of the country's major banks, Landsbanki under sweeping new powers which came into force yesterday – amid warnings that the entire country could go bankrupt.
It is the second nationalisation in little more than a week after ministers were involved in a rescue of rival Glitnir.
The wider Footsie made modest gains – mostly driven by a recovering oil price which bounced back slightly after hitting an eight-month low yesterday. Oil giants BP and Royal Dutch Shell both advanced around 4%.
The Treasury has refused to comment on Mr Darling's meeting with the banks.
Liberal Democrat Treasury spokesman Vince Cable said: "It looks as if RBS are the latest victim of a speculative attack. The continuing uncertainty over the Government's intentions is proving very damaging.
"There is a growing political consensus around the ideas the Liberal Democrats have set out for the Government injecting capital into banks in exchange for shares. This will produce income for the Government and eventual profit for taxpayers from a future sale.
"There must be no question whatsoever of ministers just handing over taxpayers' money to banks or taking on their bad loans. Any injection of funds must be part of a comprehensive programme which fully protects taxpayers' interests.
"We're effectively talking about part-nationalisation, and there is no point in trying to conceal that. The Government must come clean on its plans very quickly, otherwise continued uncertainty will force more banks to the wall.
"It is much more sensible to deal with this proactively, rather than through a succession of collapses like those of Bradford & Bingley or Northern Rock."
Government set to take £50bn stake in Britain's top banks
BILL JAMIESON & LINDSAY McINTOSHTHE government is preparing to buy a huge stake in Britain's stricken banks to boost confidence in the economy as the freefall in global markets continues.
News of the drastic measure emerged after the UK's leading shares suffered their biggest ever one-day fall and as European governments failed to agree a common strategy in their war against the global financial crisis.
Under the plan, to be announced later this week, The Scotsman understands that the government will inject between £30 billion and £50 billion into the banks, with more to follow if required.
In return, the state will receive preference shares to be held for the duration of the crisis. The four key banks involved are believed to be HBOS, Lloyds TSB, Barclays and Royal Bank of Scotland.
They are understood to have agreed the capital injection in outline over the weekend and in further discussions yesterday. Indeed, yesterday's massive sell-off of bank shares leaves them with no alternative.
However, the move will raise concerns over the exposure of taxpayers to financial risk, following the use of public funds to nationalise the stricken bank Northern Rock earlier this year.
The FTSE 100 fell 7.85 per cent, wiping about £93 billion off the value of the UK's largest firms – the biggest percentage fall since the Black Monday of 1987 and the largest points fall since the index was launched in 1984.
No company was spared the agony, but the Edinburgh-based banks RBS and HBOS were among the biggest losers, with crashes of 20.46 per cent and 19.8 per cent.
RBS saw its credit rating brought down a notch by Standard & Poor's, the rating agency, indicating less certainty among key analysts as to its position. A House of Commons statement by Alistair Darling, the Chancellor, did nothing to ease the panic, as confusion reigned over what action individual European countries were taking to try to avert the crisis.
In the United States, the main Dow Jones share index fell sharply – further evidence that the American government's $700 billion (£380 billion) bail-out had not proved to be the silver bullet that many predicted it would be.
The Dow recovered in erratic trading to a loss of 369.88 points, or 3.58 per cent, to close at 9,955.50, dropping below the 10,000 mark for the first time since October, 2004.
At its worst point, the Dow was down more than 800 points, an intraday record – surpassing its previous record for a one-day decline, 778, which was set a week ago.
Underlining the economic devastation, a new report today by the British Chambers of Commerce will say that the UK is already in a recession, with business confidence, profits and turnover at record lows and unemployment set to rise by up to 350,000 in the next year.
The authoritative survey of 5,000 firms by the British Chambers of Commerce shows a worsening economic outlook and rising unemployment amid a "collapse" in confidence across all sectors of industry. In addition, the country's largest insolvency specialist has warned that more than 300 UK retailers are likely to go under in the new year, when banks cut off their lifeline funding.
Two arguments have made the unprecedented government intervention in Britain's banks an urgent necessity.
One is that they are unable, in the current chaotic conditions, to raise fresh capital from their own shareholders.
HBOS, RBS and Barclays have already raised extra capital by way of rights issues and shareholders would simply balk at a further cash request. The second is that the outlook for the global economy has nosedived over the past few weeks and banks will need additional liquidity in which to operate as trading conditions worldwide worsen.
Separate arrangements may be made for HSBC and the Spanish bank Santander, which owns Abbey and has just bought the retail operations of Bradford & Bingley.
Although they make the bulk of their profits overseas, they also have substantial operations in the UK.
The fine details have still to be worked out between government ministers and the banks over the next couple of days, but authoritative sources say that a deal should be announced before the end of the week.
Speaking to the United Jewish Israel Appeal in London last night, Gordon Brown, the Prime Minister, said the government was ready to take action to prevent "irresponsible risk-taking" by banks and other financial institutions.
The cash injection will be designed to lift the banks' "tier one" capital ratios – the amount of capital a bank is expected to hold to allow it to absorb losses but still protect its depositors – from about 6 per cent to between 7 and 8 per cent.
Further help for the banking system may come on Thursday with a half-point cut in interest rates.
While the Bank of England's monetary policy committee will maintain its independence, events of recent days, and in particular the scale and savagery of the falls in stock markets yesterday, should compel members to reduce rates at the earliest opportunity – and that is when they hold their regularly monthly meeting this week.
Only two days after European leaders had assembled to find a united way forward, cracks were apparent, with countries taking unilateral action.
Confusion reigned over whether Germany had guaranteed to back all savings, after Angela Merkel, the chancellor, seemed to make such a statement on Sunday, only for sources to claim that she had not intended for legislation to be drafted to back it up.
Denmark, Greece, Ireland and Austria have given their own guarantees, while Spain hinted yesterday that it might do the same.
Iceland – hugely exposed to the turmoil because of its reliance on banks – teetered precariously close to total economic chaos, as its government belatedly issued a guarantee but failed to deliver a wider escape plan.
In his speech to the Commons, Mr Darling said the £50,000 savings guarantee would come into force today, and that the Financial Services Authority would look at raising the threshold further.
But even as he spoke, markets were tumbling around the world. There were no winners on the FTSE 100, which fell almost 8 per cent, while the Dow Jones fell below the 10,000-mark for the first time in four years.
"Another Monday, another banking crisis," said Manoj Ladwa, a senior trader at ETX Capital. "Just when the market thinks it has found a base level, there's another jolt to the system. Black Mondays used to be a once-a-decade event, now they're coming along more regularly than a London bus."
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Bill Jamieson: Either this desperate plan works or the economy is done for•
Q&A: How new safety net for savings could benefit you•
'Recession here and 350,000 jobs will go'•
More than 300 retailers could go bust after Christmas 