Lloyds Banking Group shares plunge

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Royal Bank of Scotland steadied a little after Monday's mammoth 67% fall, but doubts over the Government's second bank bail-out and renewed fears for the sector's health dragged its rivals lower.

Lloyds, created only on Monday from the merger of HBOS and Lloyds TSB, was the worst hit, followed by Barclays down nearly 20%.

The falls extend losses across the sector on Monday in light of news that RBS expects to report record annual losses, but also comes in the wake of the recent expiry of the short-selling ban.

The FSA had until last Friday protected financial stocks from short-selling - when investors, typically hedge funds, borrow shares in a company which they then sell in the hope of buying them back later at a lower price.

Lloyds came under attack following market talk that the group could be next in line to become majority owned by the Government.

The group is currently 43% owned by the State after the first round of Government aid and experts have said there is a chance it will need to hand over further equity.

RBS is to become 70% owned by the Government - up from 58% - after Monday's announcement that it will swap its £5 billion preference shares for ordinary shares.

Lloyds is not thought to be included in this, with the group's chairman, Sir Victor Blank, seeking to give assurance in an interview with Sky News that he does not want the Government to take a bigger stake in the bank.

However, fear is sweeping the market that further nationalisations and big losses are on the cards.