The share prices of Switzerland's two largest banks plunged this afternoon after the country's banking regulator gave warning that UBS and Credit Suisse could face further writedowns arising from the US sub-prime meltdown.

Daniel Zuberbühler, the director of the Swiss Federal Banking Commission, told a Swiss newspaper that financial risks were spreading from mortgage-related investments to other forms of borrowing such as credit cards and retail and commercial loans.

"People here are talking about the next hotspots, meaning areas that will come under pressure next ... It cannot be ruled out that there could be more [losses] to come," he said.

At 2pm shares in UBS, Switzerland's largest bank, had fallen more than 8 per cent to SwFr42.24 each, while shares in Credit Suisse, the country's second-largest bank, had dropped almost 6 per cent to SwFr57.75 each.

UBS's woes were compounded by a report from analysts at Morgan Stanley, who cut the bank's rating from equal-weight to underwright amid concerns about the strength of UBS's balance sheet. The analysts said that they still say "headline risk from sub-prime and other asset concerns".

UBS yesterday increased its estimate of fourth-quarter losses from US sub-prime related investments. The bank said that its quarterly losses would be $14 billion, $4 billion more than the bank estimated in an update to investors last month. UBS's total sub-prime losses of $18.4 billion are the highest of the European banks so far.

The bank said that it would make a loss of SwFr4.4 billion for 2007 as a result of its investments in risky American mortgages. It is due to report its full-year results on February 14.

In the third quarter of 2007, Credit Suisse reported a $2 billion sub-prime-related writedown.

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