Shares in American Home Mortgage Investment, the US lender, nosedived yesterday after its credit lines were cut and it pulled the plug on hundreds of millions of dollars of home loans, as the US mortgage crisis ensnared another victim.

The lender was forced to pull $300 million (£147 million) of home loans already agreed on Monday and was preparing to break its agreement on up to $500 million more yesterday.

American Home Mortgage’s warning came just days after it conceded that a surge in defaults on so-called “prime” and near-prime mortgages, made to borrowers with solid credit histories, had prompted “major” writedowns on its loan book. The group’s waning fortunes also prompted it to delay its latest quarterly dividend.

American Home Mortgage’s shares, which plunged by 45 per cent after the first warning, fell by nearly 90 per cent yesterday. This left its market value, which reached $1.95 billion in December, at just $62 million last night.

The S&P 500 index declined by 1.3 per cent, to close at 1,455.27, as investors fretted that the growing woes of America’s mortgage industry would fuel a more general credit crunch by rippling across the home-loan market to other forms of debt.

Investors were also reacting to news that Harvard University has suffered a blow from the credit crisis after a hedge fund manager that it backed as a start-up lost more than $1.5 billion (£736 million) in July and has been sold for a knock-down price to a rival firm.

The hedge fund manager, Sowood, was set up in 2004 by Jeff Larson, a former manager of Harvard’s endowment fund, with $500 million in “seed funding” from his former employer.

However, after the loss of more than half of Sowood’s value last month, its lenders demanded more collateral and Sowood was forced to sell its remaining assets to the rival Citadel, at a fraction of their purchase price.

Sowood, based in Boston, manages two highly leveraged funds, which together had as much as $15 billion worth of investments, many of them relating to bonds and loans. However, the credit crisis triggered by the collapse of the American market for sub-prime mortgages pushed down the value of Sowood’s credit holdings and erased much of the two funds’ $3 billion of equity.

In a letter to investors, Mr Larson said that he would close the two funds and return the proceeds to investors after “several declines in the value of our credit positions and non-performance of off-setting hedges”.

Mr Larson added: “The transaction \ enabled us to avoid anticipated forced sales at extreme prices. The weakness in corporate credit, particularly focused on loans and loan credit-default swaps, accelerated sharply during the week of July 23.”

Sowood’s Alpha Fund Ltd fell by 57 per cent in the month and its Alpha Fund LP fell 53 per cent as the cost of insuring defaults on high-risk bonds, through so-called credit swaps, hit record highs on both sides of the Atlantic.

Sowood is the biggest hedge fund casualty from America’s credit crisis since Bear Stearns said in June that two funds it manages had lost $1.5 billion and decided to close them.

Citadel, a $15 billion hedge fund that is preparing to sell or float part of its management company, is carving a role as a buyer of unwanted debt. In September it teamed up with JPMorgan Chase to buy the energy trades of Amaranth Advisors, the $6.6 billion hedge fund manager that collapsed after betting the wrong way on gas prices. Citadel later bought JPMorgan’s portion of those trades.

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