Lloyds shares down 49 per cent and Pound takes a pounding

At the same time, sterling took another pounding on the foreign exchanges and senior City figures said Britain was in effect "bankrupt".

Shares in Lloyds were down 49 per cent to 33.8p by late morning after a 34per cent tumble yesterday.

Analysts said that the taxpayer is likely to be forced to increase its stake in the high-street lending giant from the current 43 per cent because of the scale of its losses in the sub-prime mortgage and other "toxic" markets.

City experts said the holding would have to be increased to at least 50 per cent and said full-scale nationalisation would have to be considered. Lloyds has already received around £17billion in taxpayers' bail-out money.

Manus Costello, analyst at Merrill Lynch, said: "We expect Lloyds Banking to lose money in 2008, 2009 and 2010, largely as a result of bad-debt provisions."

At its worst point, its two-day fall wiped more than £5billion from the value of the bank - now known as Lloyds Banking Group after its takeover of HBOS - although the shares later recovered some ground to stand at 45p, down 20p or 31 per cent.

Other banks also suffered: Barclays was down 21 per cent, or 18.5p at 69.5p and HSBC fell 3.5 per cent, or 17.5p to 483.5p. Royal Bank of Scotland, which lost two thirds of its value yesterday, saw its shares rally slightly.

Wholesale nationalisation of RBS was mooted as senior members of the Government pushed for 100 per cent ownership rather than the 70 per cent the taxpayer currently owns.

It was the second day of the new phase of the financial crisis, which has so far defied all attempts by the Government to contain it. The four major high street banks have lost more than £200 billion in value since the first signs of the credit crunch 18 months ago.

A senior minister yesterday revealed that it could be almost a decade before the storm fully blows itself out.

City minister Lord Myners said that a new government insurance scheme aimed at stabilising the financial markets would take the financial markets through this economic downturn and through and beyond the next cycle.

"So we are probably talking about policy durations of not less than five years, probably not longer than eight or nine years."

There were also warnings that the banking crisis is starting to have a dangerous impact on Britain's financial standing in the world.

As the value of sterling fell sharply against the dollar, international investor Jim Rogers advised against investing any money in the UK. "I would urge you to sell any sterling you might have," he said.

Hedge fund manager Crispin Odey said: "The country is bankrupt and sterling is under huge pressure."

David Buik of brokers BGC Partners said that the end of the ban on short-selling of financial shares may have contributed to the extraordinary turmoil this week.

But he added: "The greater problem is that the regulatory authorities have been wholly inadequate."

A spokesman for Lloyds Banking Group said: "We have a robust capital position and a strong business model."

In an interview yesterday Lloyds' chairman Sir Victor Blank said he did not want to see the Government take outright control. He said: "The reason why we are at 43 per cent is that we believe that that is better for our customers We believe it is better for our staff and we believe that in time it will be better for our shareholders."