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

RBS shares closed at a record low of of 90p, 39 per cent down, on suggestions that it had approached the Government about a capital injection that would dilute the holdings of existing shareholders.

Lloyds TSB was down by almost 13 per cent and HBOS, its putative merger partner, fell by 41 per cent.

The position 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.

In London, the FTSE 100 opened 1.8 per cent higher, rising 84.65 points to 4,673 points but the banking sector fears sent the index back into negative territory, although it closed at 4,605.22, 0.35 per cent up.

The volatile trading 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 both gave up earlier sharp gains.

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.

The Bill is expected to include formal measures for the authorities to take control of a failing bank and will give the Bank of England statutory responsibility for maintaining financial stability.

The Chancellor last night held talks with banking executives on how the scheme, which could see the Government effectively part-nationalise such banks, would work.

The gloomy picture was compounded as the BCC warned the Government and monetary policymakers that they must act immediately to boost market confidence in order to avoid a prolonged recession.

In its quarterly survey, the BCC found that confidence among British companies fell to its lowest on record in the third quarter as sales and orders tumbled and it called for an immediate half-point cut in the base rate.

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