Citigroup stunned investors with a warning that turmoil in the mortgage markets will wipe as much as $3.3 billion off its third quarter profits.

The world's largest financial services group said that the meltdown in sub-prime mortgages combined with a deteriorating environment for consumer credit would cut profits after tax by about 60 per cent.

This time last year, Citi generated net income of $5.5 billion, suggesting this quarter's figure will be as low as $2.2 billion.

Charles "Chuck" Prince, Citi's chairman and chief executive, said: "Our expected third quarter results are a clear disappointment. The decline in income was driven primarily by weak performance in fixed income credit market activities, write-downs in leveraged loan commitments, and increases in consumer credit costs."

Citi will now write down $1.4 billion on its leverage debt business. As at the end of the third quarter, the bank had committments to fund $57 billion worth of deal debt.

The financial services giant will also record a loss of $1.3 billion on the value of its sub-prime mortage-backed securities, which include highly geared investments such as collateralised loan and debt obligations.

On top of that "significant market volatility" will see Citi hit by a $600 million loss in fixed income credit trading.

Mr Prince added that the quarterly profits slide would be an "aberration" and business should return to normal in the fourth quarter.

The profits warning at Citi comes as UBS, the world's biggest money manager, unveiled a $3.4 billion writedown as a result of losses at its hedge fund and exposure to sub-prime.

Third quarter losses at UBS are expected to total as much as Sfr800 million.

It came as Credit Suisse said its investment banking and asset management operations had been "adversely impacted" by the seizure in the credit markets. The Swiss bank added that it still expected to post profits for the third quarter.

Deutsche Bank is also being keenly watched for signals about the strength of the market downturn. It has been reported that the bank is preparing to take a €1.7 billion writedown in its leveraged loan portfolio.

Shares in Citi, worth more than $232 billion and listed on the New York Stock Exchange, closed at $46.67 on Friday.

In an update set to send a shockwave across the world's top investment banks, Citi said its credit costs had risen by about $2.6 billion before tax compared with this time last year, "due to continued deterioration in the credit environment, organic portfolio growth, and acquisitions".

Today's warning marks a further setback for Chuck Prince, who has been in charge at the bank since 2003. Most recently, Mr Prince unveiled a plan to axe 17,000 jobs across the group as part of a cost-cutting drive aimed at saving about $2.1 billion this year, $3.7 billion in 2008, and $4.6 billion in 2009.

The bank took a pre-tax charge of $1.38 billion in the first quarter as a result of the measure. It expects to incur further charges this year of about $200 million pre-tax.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive