Fears that America is facing another bank collapse spread across Wall Street yesterday, despite emergency measures by the Federal Reserve Bank to prevent the US banking system from imploding and a government-backed rescue deal to save Bear Stearns.

Shares in Lehman Brothers plunged as much as 40 per cent before closing down about half that at $31.75 as traders worried that the investment bank would experience the same lack of confidence from its counterparts and customers as Bear Stearns had faced at the end of last week and would suffer a surge in liquidity demands.

Traders ignored comments by Richard Fuld, Lehman’s chairman and chief executive, as he insisted that the bank had $35 billion (£17.5 billion) of cash and liquid assets and a further $160 billion of unencumbered assets, which could be sold to generate cash.

The stock of its bigger rivals also fell sharply. Shares in Morgan Stanley were down 8 per cent at $36.38 at the close, those of Merrill Lynch were off 5 per cent at $41.18, Citigroup ended the day down 6 per cent at $18.62 and Goldman Sachs closed down 4 per cent $151.02. The Dow Jones industrial average swung wildly within a 300-point range before closing up 21.20 points at 11,972.30.

Interbank lending almost ground to a halt yesterday, with banks fearful of dealing with each other, prompting talk of another round of coordinated central bank aid.

In an effort to minimise the fallout and in conjunction with the firesale of Bear Stearns to JPMorgan Chase, on Sunday the Fed cut its discount lending rate by a quarter of a percentage point to 3.25 per cent and announced another series of liquidity measures.

The problem was particularly acute in sterling markets, with the gap between indicative three-month interbank borrowing rates and the Bank of England loans more than 70 basis points – the highest for the year. Some analysts said that big players on the interbank market had been doing as little as £700 million a day of business over the past week, a fraction of the several billions that would have been executed a year ago.

Panic-selling of shares in MF Global - a derivatives broker – pushed its shares down by as much as 70 per cent in New York.

Shares in Bear Stearns, the bank that was rescued in an all shares deal by JPMorgan Chase at the weekend at a 94 per cent discount, plunged almost 84 per cent to close at $4.81. JPMorgan was expected last night to dismiss about half of Bear Stearns’s staff, making about 200 redundant from its office in Canary Wharf, London.

The severe losses among banking stocks came as one of the world’s leading economists said that the US Federal Reserve’s dramatic actions over the past few days had been interpreted as evidence that the central bank believes that there is another banking group facing severe funding difficulties.

Robert Shiller, of Yale University, who is co-founder of America’s leading house price index, told The Times: “It signals that the Fed must know how bad things really are. It looks like they think something is really wrong.”

Chris Whalen, head of the Wall Street consultancy Institutional Risk Analytics, said: “Any firm not affiliated with a large commercial bank is vulnerable to suffer from severe funding difficulties. We have reached the end of the game. Around two thirds of all hedge funds won’t be around by the year end because they can’t survive without leverage.”

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