A meltdown in the credit markets could lead to banks, hedge funds and private equity firms finding themselves embroiled in years of costly litigation, lawyers warned today.

They revealed clients are "lining up" for advice on their legal exposure to the crisis.

The sheer complexity of financial instruments could make it almost impossible to determine liability and the extent of losses if the worst is to happen, experts said, and predicted it could take years for the courts to sort out.

In the past few weeks, law firms have received an increasing number of inquiries from clients wanting to know if they can be held to their commitments if the credit markets collapse. At the same time, private equity and corporate clients want to know if the banks can be forced to make good on their lending promises.

John Ogilvie, a litigation partner at Herbert Smith, said that his clients had so far remained calm but that today was a "tipping point" in determining whether the wobble was simply a short-term reaction to problems in the US or something more serious.

"We're not there yet," he said. "To scream that the world is about to end would be over the top. But today is really important."

Yesterday, the law firm Allen & Overy held a conference call among its banking and finance partners to discuss their response. Tim House, head of banking litigation, said: "The clear message was that New York, Hong Kong and London - particularly London - are being asked to advise much more frequently on problems relating to subprime and also to the leveraged finance market, particularly private equity."

Mr House said that the complexity in the market made it difficult to give clients a clear answer.

"It's very difficult to predict," he said. "You've got a slow-burning deterioration with fires breaking out in unexpected areas. It's very difficult for banks, regulators and lawyers to understand where the concentration of risk is."

Mr House said there was a possibility of the UK seeing disputes over failed hedge funds such as that launched yesterday in New York by an investor who has sued Bear Stearns for not doing enough to stop the collapse of a fund that invested heavily in subprime bonds.

"What hasn't happened yet but a lot of people anticipate is underlying investors beginning to launch claims on the basis of an unexpected and very sudden decrease in value of investments in funds and funds of funds," Mr House said.

He added: "It could happen very quickly."

Simon Willis, a partner at Barlow, Lyde & Gilbert - one of the few City firms willing to sue banks - said that investors who find themselves caught short will seek redress through their lawyers. "They will want to know what recompense they have and are already lining up to ask us," he said.

Recently, a report by Standard & Poors said legal action brought by disrguntled investors was one of the leading threats to investment banks and said the size of the threat was "unquantifiable".

It is a generally accepted that litigation increases during a downturn in the market as investors seek to recover their losses. But lawyers predict that the coming increase could be bigger than ever before.

Tom Custance, a partner at Fox Williams, said: "When things start to go bad we always see a surge in litigation. The potential this time is increased because things are more complicated and there are things that have not been tested.

"It's not simply a case of dusting off old case law from six or seven years ago. The markets are far more sophisticated than they were the last time the courts had to handle a major downturn."

Mark Bezant, a managing director at LECG, a consultancy that assesses litigation damages, said: "The financial markets have been engaged in a giant game of pass the parcel as businesses, assets, income streams and risks were packaged and re-packed, traded and re-traded. The game is now so complex that no-one really knows what's in the parcel."

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