Shares in Countrywide Financial fell by more than a quarter yesterday to close at their lowest level since July 1996, as rumours spread across the markets that America’s largest mortgage group was poised to file for bankruptcy.

The group denied that it faced bankruptcy, but the shares slumped nevertheless, falling $2.17, or 28.4 per cent, to close at $5.47 — their biggest single-day drop since Black Monday in October 1987.

“There is no substance to the rumour that Countrywide is planning to file for bankruptcy and we are not aware of any basis for the rumour that any of the major rating agencies are contemplating negative action,” a spokesman for Countrywide said.

Investors have become increasingly jittery about Countrywide — and mortgage-related companies in general — as a surge in defaults on high-risk sub-prime home loans in America has pushed down the value of houses and related securities.

Countrywide has been forced to tap emergency credit lines and needed a $2 billion (£1 billion) bailout from Bank of America last year, fuelling concerns that the group was close to bankruptcy in the worst housing slump in 16 years. The group reported its first loss in 25 years in its third quarter, but insists that it has adequate cash to run its business and that it will make a profit in the fourth quarter and for the full year.

The bankruptcy rumours came hours after it emerged that the mortgage lender faced allegations that it had fabricated documents related to a bankruptcy case in Philadelphia, raising questions about its business practices. The Countrywide spokesman said: “It is not Countrywide’s policy to create or fabricate any documents as evidence that they were sent if they had not been.” He added that he expected the investigation to find nothing improper.

The Philadelphia case is just one of about 300 bankruptcies in which Countrywide’s practices have come under scrutiny. The group is also facing lawsuits from shareholders alleging that the lender had not been honest about its financial position.

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