Banks dived in early trading on Friday after a bleak trading statement from HBOS revealed the extent of its bad debts on mortgages and unsecured lending.
Lloyds TSB, whose shareholders approved a merger with HBOS last month, tops the loser's table after falling almost 15% while HBOS slumped more than 13%.
In its trading update, the bank said bad debts and losses on assets had risen to £8bn in the first 11 months this year, up £3.2bn since the end of September. Bad debts on corporate loans jumped to £3.3bn from £1.7bn.
HBOS shareholders are set to meet in Birmingham today to vote on the plan to be taken over by Lloyds and raise capital by offering £8.5bn ordinary shares and selling £3bn preferred shares to the Government.
The Royal Bank of Scotland, which has taken a 10% hit, and Barclays (7.45%) are also suffering as the FTSE stoops below 4,300, a fall of more than 2.5%, for the first time in three days.
Light relief is being provided by biopharmaceutical company Shire, up more than 2% this morning, but other winners, including Old Mutual, are toasting only minimal sub-1% gains.
Another factor understood to have hit London markets was the failed $14bn bail-out of the beleaguered US car industry. The deal failed to get enough support in a procedural vote in the Senate on Thursday. Although the vote came after the close in New York, anxiety over the deal continued to hit investor sentiment.
The Dow Jones fell almost 200 points, more than 2.2%, as it slumped to 8,565, with GEN Motors among a number of heavy losers.
JPMorgan Chase led the losses, falling more than 10%, while Bank of America (10%) and Citigroup (9%) also nursed falls. Chevron Corporation, however, made marginal gains, as did Johnson and Johns.
Japanese stocks retreated for the first time this week on Friday following the failure of the auto-industry bail-out. The Nikkei 225 Stock Average tumbled more than 480 points, or 5.6%, to close at 8,235.IFAonline
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