Alliance & Leicester (A&L), the UK mortgage lender that is being bought by Spain's Santander, today revealed its interim profits have been virtually wiped out after taking a £209 million hit on risky assets and higher funding costs.

Pre-tax profits for the six months to June 30 plunged from last year's £290 million to just under £2 million.

A&L said the value of certain treasury investments fell by £66 million in the first half and the impairment of other assets cost £143 million. The £209 million charge is slightly above the £192 million writedown the bank forecast in May. Shares in A&L fell 2p to 338.5p in early trading.

At the same time the bank gave a gloomy forecast on future trading. It said: "The outlook for the UK economy has worsened as 2008 has progressed, and the degree of uncertainty about the economic outlook has increased.

"There is a risk that the current economic and market turbulence could continue for a significant period of time, and a risk of further uncertainty and contagion impacting the valuation of Alliance & Leicester."

The bank said that it was focused on improving cost efficiency, reducing core operating costs by £21 million in the first half of 2008 compared to the same period in 2007.

It insisted it was in "good shape" and said it was well capitalised and that its retail and commercial banking businesses were performing better than expected.

The bank is being acquired by Santander for £1.3 billion and will join a company that already owns Britain's Abbey.

Earlier this week, HBOS - which owns Halifax and Bank of Scotland - and Lloyds TSB both reported sharp falls in profits for the first six months of the year due to rising levels of toxic debt hitting the bank's balance sheets.

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