More than £5 billion was wiped off the value of oil giant BP today after it emerged that analysts had cut their estimates of fourth quarter profits by 25 per cent. That would slice $1.5 billion from the quarterly earnings.

Merrill Lynch, cut its estimates by 25 per cent from $5.9 billion to $4.4 billion. BP shares suffered their biggest single day fall in almost five years, sliding by as much as 28.5p, or 4.5 per cent, to 605p.

Andrew Lynch, who helps manage $8 billion at Schroder Investment Management told Bloomberg: "This shows how panicked the market is at the moment. I am not that worried because the fundamentals of BP haven't changed.''

Merrill Lynch cut its profits estimates by 25 per cent on the basis of "higher than forecast field commissioning costs, weaker than expected marketing margins and higher tax." Credit Suisse slashed its earnings forecast by 26 per cent.

The oil group, which plans to cut up to four layers of management to reduce costs, disclosed overnight that rising oil stocks around the world would lead its tax bill rising from 36 to 43 per cent.

News of the hit to earnings comes one week after global crude prices breached the $100 level for the first time.

The company will report its fourth quarter and full year results on February 5.

Peter Hitchens, oil and gas analyst at Seymour Pierce, said that cost pressure from the oil service industry and tighter retail and refining margins would squeeze BP.

He said: “It wouldn’t surprise me if people have been very optimistic and are now having to bring down numbers.”

A BP spokesman said: “When oil prices are rising, people build up oil stocks, which is good business practice, but it also means there is a higher value of stocks with a higher tax liability.”

The company added that production would suffer as a result of Production Sharing Agreements with governments, which limit production by value, rather than by volume. The agreements have the effect of reducing the number of barrels that can be sold when prices are high.

In the final quarter of last year, BP's tax burden fell to 25 per cent from 32 per cent in 2005 as inventories were run down due to falling prices.

Tony Hayward, BP's chief executive, has begun a jobs cull that will see thousands of positions axed and up to four levels of management scrapped. Some observers estimate up to 10,000 jobs will go.

Mr Hayward, who took over from his predecessor Lord Browne of Maddingley in May 2007, has faced a baptism of fire which has included the Alaskan oil spill, the aftermath of the fire at BP's Texas City refinery in which 15 people died and sliding margins from its refining business.

He was also criticised last Autumn for revealing in a memo to staff that the company was braced for "dreadful" third quarter results.

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