Lehman Brothers has begun this week to dismiss 5 per cent of its workforce as the deepening credit crisis eats away at investment banking revenues and the sector prepares for a recession.

The industry has eliminated more than 2,500 jobs in London since January, with a total of 10,000 expected to go in the City by Christmas. Although it is understood that the bulk of Lehman’s 1,425 redundancies will be made in its domestic US operation, the second-biggest job cull will happen in London. Lehman, which has its European headquarters at Canary Wharf, has already begun to notify staff that they no longer have a future with the bank.

It is also understood that the bank has refused to rule out further cuts, should market conditions continue to deteriorate, and expects that if the UK and European economies follow the US into a sharp slowdown, it will cut more this year from its workforce in the City.

So far this year, Citigroup has shed 400 staff in London, Bank of America has made 650 redundant when it closed its commodities and energy desk, Deutsche Bank has shed 120 within the Square Mile, Credit Suisse has cut 150 workers, and UBS and Goldman Sachs have eliminated 1,500 each globally, with many of the redundancies made in the UK.

Job losses in the City are expected to rise rapidly this year, with no end in sight for the global credit crisis, which erupted from the increasing number of Americans defaulting on their mortgage repayments.

Duncan McKenzie, the director of economics at the International Financial Services, the London research group, has predicted that the head-count in the City will fall by 10,000 by Christmas as banks, fund managers and broking houses try to adapt to fewer deals and lower trading volumes.

Next week Lehman Brothers starts the US banking reporting season for the first quarter of the financial year.

Fragile sentiment towards the sector was highlighted yesterday as liquidity rumours circulated around Bear Stearns. The rumours, denied by the company, contributed to its stock closing down by 7.29 per cent.

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