Shares in Lehman Brothers dived by nearly 50 per cent to a 13-year low as the market opened after analysts raised concerns that the investment bank's restructuring plan was not enough to solve its funding crisis.

The bank's stock plunged to $3.88 after a string of analysts at banks including JPMorgan, Wachovia, Goldman Sachs and Citigroup increased their loss estimates for the group and reduced their outlook for its shares. By close, shares had regained little ground, still down by 41 per cent or $3.03 at $4.22.

The fall in Lehman's share price dragged down others in its sector including Merrill Lynch, which lost 16.6 per cent to $19.43, its lowest level in a decade.

In spite of continued concerns over Lehman Brothers, the Dow Jones industrial index rallied late in the day as heavy sell-offs were contained to a handful off stocks. By close, the financial sector had risen 1.5 per as rumours circulated that Bank of America was in talks to buy Lehman. Bank of America shares rose 2 per cent to $33.06.

The Dow Jones rose by than 164 points to close at 11,433.71.

In London, the FTSE 100 index of leading shares closed down 49 at 5,317.

Analysts downgraded their expectations after Lehman announced on Tuesday a record quarterly loss of $3.9 billion (£2.2 billion) for the third quarter and said it would spin off up to $30 billion of distressed commerical property assets and sell 55 per cent of its asset management business.

Prashant Bhatia, an analyst at Citigroup, reduced his recommendation on Lehman’s shares from "buy" to "hold", on the basis that "confidence and perception issues are overwhelming Lehman’s franchise."

Meredith Whitney, an analyst at Oppenheimer & Co, increased her estimate for Lehman’s loss this year from $6.67 a share to $10.24 a share. She said: "Lehman still faces challenges to earnings given a lower capital market environment for the next several quarters and further writedowns to its risk exposures."

Meanwhile, new data showed that the number of people filing claims for unemployment insurance fell to 445,000 in the week ended September 6, as companies cut staff to help boost profits in a slowing economy.

Times Recommends

• Minister in talks with Saudis to protect creditors
• Premier Inn hits back in £29-a-room row
• Bankers hit back at 'populist' bonus supertax