Investor confidence in the strength of Britain's banks snapped yesterday amid growing fears that many would be forced to raise yet more fresh capital to cushion losses on hundreds of billions of dollars of toxic assets.

The new jitters over banks and the wider global economy sent shares plunging on both sides of the Atlantic. The FTSE 100 index of British blue chips sank by 219 points to 4,181 with bank shares hammered the hardest.

A forecast from Morgan Stanley that HSBC would have to cut its dividend and seek up to $30 billion from shareholders was followed by a separate estimate from JP Morgan that Royal Bank of Scotland (RBS) would have to take a further £37 billion of writedowns on its most toxic assets and raise £6 billion of additional capital - a move that could lead to full nationalisation. Fears that banks could be forced to crystallise the true losses on their toxic assets were triggered by growing speculation that Citigroup might be forced into a firesale of assets and by the British Government's plan for a fund or “bad bank” to buy and hold toxic assets.

Barclays shares, which fell 10 per cent on Tuesday, dived a further 23.8p, or 14.3 per cent, yesterday, in part because of concerns about the sudden departure on Tuesday of Sir Nigel Rudd, the deputy chairman, after 13 years at the bank. There was speculation that Sir Nigel's departure may have been prompted by a disagreement with John Varley, the chief executive, over valuations of toxic assets, with Sir Nigel reportedly favouring a more conservative approach.

Those close to both sides insisted that there had been no disagreement over valuations, although JP Morgan issued a note suggesting that Barclays would need to take a £21 billion writedown on its most toxic assets. That would require the bank to raise an additional £3 billion to maintain its core Tier 1 Ratio, a measure of financial stability, at a typical level of 6 per cent.

The British Government is now sitting on a theoretical loss of £13.7 billion on its bank investments after falls at RBS, Lloyds TSB and HBOS. The mood was not helped by a surprise profit warning from Deutsche Bank, Germany's largest. It warned of a €4.8 billion loss in the final three months of last year.

London shares lost £53 billion off their value as alarm over the scale of the global recession swept markets worldwide. London suffered the heaviest losses among leading markets with the FTSE 100 index falling 5 per cent. This marked the FTSE's sixth straight session of losses and left it down 5.8 per cent this month, after losses of 31 per cent last year - its worst performance since its creation in 1984.

In Paris, the CAC40 ended down 4.56, while in Frankfurt the Dax index fell 4.63 per cent. In New York, the Dow Jones industrial average closed down 248 points, or nearly 3 per cent, while the broader S&P 500 index lost 3.3 per cent as US retail sales fell by 2.7 per cent last month compared with November. Against a year earlier, sales plunged by a record 9.8 per cent.

In the eurozone, industrial production fell 1.6 per cent in November, leaving it down 7.7. per cent on a year earlier - the biggest drop since 1990. Official figures confirmed that the German economy grew by a meagre 1.3 per cent last year, fuelling fears that GDP could fall 3 per cent or more this year.

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