Shares in Royal Bank of Scotland (RBS) plunged by almost 40 per cent today to less than £1 on fears that a £50 billion bailout of high street banks would result in a partial nationalisation of several household names.

RBS stock fell to a record low of 90p on suggestions that it had approached the Government about a capital injection that would dilute the holdings of existing shareholders.

But the bank said this afternoon: "RBS did not make a request to Government for capital."

The shares closed at 90p, down 58.1p, or 39.23 per cent.

Lloyds TSB fell by 12.9 per cent, losing 33.5p to 225p, and HBOS, its putative merger partner, dropped by 66.8p - or 41.5 per cent - to 94p. Barclays was trading 29p lower at 285p, a fall of 9.24 per cent.

Last night, Chancellor Alistair Darling was holding talks with the heads of Britain's leading banks over how a tax-funded £50 billion plan to part-nationalise UK lenders might work.

This morning, John Varley, chief executive of Barclays, issued a categorical denial that it had asked for funding from the Treasury. He said: "Contrary to press rumours, Barclays has not requested capital from the Government and has no reason to do so."

In London, trading on the FTSE 100 blue chip index was subject to huge swings, and closed up 16.03 points at 4,605.22 after the US Federal Reserve unclogged the commercial paper market, helping companies to fund day-to-day business.

But earlier trading in London was not helped by a warning from the British Chambers of Commerce (BCC) that Britain is already in recession and could face a prolonged downturn.

This followed yesterday's record 7.8 per cent fall as panic swept global financial markets, sending America's Dow Jones Industrial Average down to a four-year low after dipping below 10,000 points for the first time since October 2004. At one point the Dow was down more than 800 points.

Today's swings in London were mirrored in other European markets as France's CAC 40 and the Dax in Germany dipped and then rose in afternoon trading.

Dealers had been banking that plans by the Government to pump £40 billion of fresh capital into high street banks coupled with banking reform legislation, due to be outlined today, would calm markets.

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