The number of Californians defaulting on mortgages has reached such a level that Wachovia, the fifth-largest US bank by market value, says that it has been forced to raise up to $8 billion (£4 billion) in emergency funding and raise its provisioning.

The group, which unveiled a surprise net loss of $350 million in the first quarter, slashed its dividend by 41 per cent to 37.5 cents saving $2 billion of capital annually “to build capital ratios and provide more operational flexibility".

The bank, which made a $2.3 billion profit in the same quarter a year ago, reported provisions of $2.8 billion to cover losses on mortgage-related investments and wrote off $1.6 billion of debt.

Wachovia said in a statement: "The provision largely reflected more severe deterioration in the residential housing market, particularly in specific markets in California and Florida," it said.

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Shares fell by more than 10 per cent to $24.85 following the news.

Executives told analysts on a conference call that it had made the decision to raise the funds after witnessing a dramatic change in the behaviour of borrowers in California where there had been "significant" increases in defaults as house prices fall.

They warned that "the propensity to default rises dramatically" once equity in a borrower's property falls to zero, with further increases in foreclosures on the horizon.

G. Kennedy Thompson, the president, chairman and cheif executive of Wachovia, told the conference call: “These actions are not without cost and I wish they were not necessary, but they are.”

Mr Thompson added: “The precipitous decline in housing market conditions and unprecedented changes in consumer behavior prompted us to update our credit reserve modeling and rely less heavily on historical trends to forecast losses.”

He said that the bank had embarked on the capital raising through a public offering of common shares and perpetual convertible preferred stock. The bank is looking for $7 billion in funds with an over-allotment option of 15 per cent.

This is likely to be oversubscribed with strong support from existing institutional shareholders, he said.

The bank later revealed that it plans to make further job cuts in its markets and investment banking operations in the second quarter, reducing the workforce in this area by 12 per cent.

Tom Wurtz, Wachovia's chief financial officer, warned a conference call: “These markets are going to remain subdued for a longer period of time ... at this point it’s the time for paring back.”

Investors are expected to receive shares priced at about $23 to $24 each, a 15 per cent discount to Wachovia's share price of $27.81 last Friday.

No sovereign wealth funds are understood to be among the investors injecting capital into Wachovia. Warburg Pincus, the buyout firm, has been named in media reports as one of the potential investors.

The bank's move follows its raising of $3.5 billion through a preferred-stock sale only two months ago which Mr Thompson said would "provide greater certainty that we are well positioned in 2008".

It is believed that Wachovia's latest deal is similar in structure to the $7 billion infusion announced by Washington Mutual last week.

Wachovia's problems stem from its $25 billion purchase of Golden West Financial two years ago when the US housing market was near its peak. Golden West's loans are mainly in California, one of the hardest-hit housing markets in the US.

Most of its customers were given adjustable-rate mortgages that allow borrowers to decide how much they repay each month.

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