Shares in Halifax owner HBOS crashed by a quarter today after it issued a thumping profits warning and Lloyds TSB slashed its £12 billion takeover bid in half.

HBOS said falling property prices and growing numbers of customers defaulting on mortgages will "impact substantially" on profits this year.

Revised terms of its proposed take-over by Lloyds TSB were also unveiled following today's £17 billion Government bailout of both banks and the vicious slump in HBOS shares since the deal was announced last month.

HBOS shareholders will now get 0.605 Lloyds TSB shares for every HBOS share they own down from the 0.833 they were to get. That makes the deal worth just £6 billion compared with the earlier bid of £12.2 billion.

HBOS shares tumbled 29.2p to 95p while Lloyds TSB was down 12.6p to 176.8p, nearly 7%, after it made markdowns and writedowns of £888 million. The banks said HBOS chairman Lord Stevenson and chief executive Andy Hornby would leave the combined group once the deal is completed.

The pair have been heavily criticised for the demise of HBOS. Hornby, who earned £1.9 million last year with bonus, walks away with a £975,000 payoff. He owns a million shares which have lost about 90% of their value in the crisis and were today worth £950,000. Stevenson, who owns 560,000 shares, will not take his £735,000 payoff.

Both HBOS and Lloyds TSB were today forced to go to the Government for funds, with HBOS raising £11.5 billion from the taxpayer and Lloyds TSB £5.5 billion.

If shareholders in both banks do not take part in the clawback related to their fundraisings, existing Lloyds TSB shareholders will own 36.5% of the enlarged group, HBOS shareholders 20% and the Treasury 43.5%.

Today's falls left HBOS shares well below the 113.6p issue price while Lloyds TSB was just above its offer price of 173.3p. The combined group, which will have a core tier one capital ratio "in excess" of 8.5%, will keep the HBOS headquarters in Edinburgh and carry on printing Bank of Scotland banknotes.

James Hamilton of Numis Securities said "chapter two" of the HBOS horror story was finally closed. "The outcome of chapter three, the UK recession, remains uncertain," he said.