Shares in European and US banks swung wildly today amid rumours that they could be facing huge losses after betting mistakenly on a fall in Volkswagen stock.

As the market value of the German carmaker rose sharply following the acquisition by Porsche of a 74.1 per cent stake, concern spread over banks' exposure to the surge.

Investors' nerves - already strained by a month of turmoil - suffered additional stress as Volkswagen shares closed up by 73.3 per cent, following a 146 per cent increase on Monday.

The rise - which briefly made the manufacturr the world's most valuable company yesterday - was attributed to a scramble by banks and investment funds to get their hands on the 6 or so per cent of stock available on the market after Porsche's raid.

Societe Generale, the French group, was hit by the speculation as its shares tumbled in Paris for the second day in a row to close down 12.27 per cent at €33.33.

The fall came despite SocGen's efforts to reassure markets that it had no skeletons in the cupboard - the third time this month that it has been forced to issue a statement in a bid to calm fears over its health.

After its shares had slumped by 15.6 per cent on Monday, SocGen reiterated its forecast of a €1 billion net profit in the third quarter.

In the US, Morgan Stanley and Goldman Sachs, the investment banks, were also caught up in the latest wave of panic selling amid rumours that they, too, could be exposed to the Volkswagen short squeeze.

A spokesman for Morgan Stanley denied the claims, and sources at Goldman Sachs said the group had no significant exposure.

But market jitters continued to undermine financial stocks, forcing authorities in Italy to suspend shares in UniCredit which fell 12.12 per cent to €1.55 and Intesa Sanpaolo whose shares dropped 9.31 per cent to €2.14.

Many are thought to have borrowed Volkswagen shares in the belief the price would fall, betting that they could sell the stock, buy it back at a lower price and keep the profit - the practice of short selling.

But the move by Porsche drove up the share price, leaving speculators with burnt fingers and forcing into a battle for the remaining free float sending Volkswagen stock even higher.

"All you would need would be to have shorted Volkswagen shares with too much leverage, and you'd be facing colossal losses," said a fund manager in Paris

Christian Aust, an analyst at UniCredit, said: "What we have seen this week is definitely short covering. Nobody else would buy Volkswagen shares at those prices. It doesn't make any sense."

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