Jitters over the credit crunch inflicted fresh pain on investors yesterday as shares in Alliance & Leicester, Bradford & Bingley and other banks fell heavily and the wider stock market lurched lower.

Fears that its reliance on paralysed wholesale funding markets could hurt A&L sent its shares diving 25½p to 581½p, while B&B slid 18¼p to 257p.

A&L was forced to put out a statement saying that it could see “no reason” for investors to sell shares. Other banks were also under fire, with Royal Bank of Scotland falling to within a whisker of the 400p mark. The cost of lending between banks rose yesterday with three-month Libor at a two-month high of 6.4475 per cent.

RBS is coming under mounting pressure to declare its exposure to the US sub-prime market after Barclays finally yielded to investor demand last week and revealed the extent of its losses. RBS is not due to put out a preclose statement until 6 December.

The souring sentiment over bank shares helped to push the FTSE 100 170.4 points lower to 6,120.8, wiping £40 billion from the value of portfolios. On Wall Street, the Dow Jones industrial average closed down 218.40 points at 12,958.40.

Fears that Northern Rock shareholders would be left with little of value from any of the rescue proposals tabled added to the gloom. Shares dived 21 per cent to a low of 104.2p after it said that none of the proposals put forward so far valued its shares at anywhere close to existing levels.

Traders were nervous that more banks would be directly hit by the crisis or indirectly by the shortage of liquidity that has pushed up interbank lending rates to unprecedented levels.

UBS, the Swiss bank, may have lost as much as $9 billion (£4.4 billion) on collateralised debt obligations - investment vehicles investing in asset-backed securities including sub-prime mortgages – according to Credit-Sights, a New York research firm.

UBS scotched the report as “incompatible” with its expectation of a fourth-quarter profit, but the anxious mood was intensified when Dresdner Kleinwort cut its recommendation on UBS from “buy” to “hold”.

European and American banks have already written off more than $50 billion on securities linked to sub-prime mortgages, but many analysts say that, nevertheless, they have not recognised the severity of the problem. Losses could reach $400 billion worldwide, according to the most pessimistic forecasts.

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