Shares in debt-ridden New Star Asset Management crashed as much as 70% today amid crisis talks that could see its banks seize control.

John Duffield's struggling group said it was in "advanced and constructive discussions" over its crippling £230 million mountain of debt.

Any deal is likely to involve a debt-for-equity swap that would see Lloyds TSB, Royal Bank of Scotland, HBOS and HSBC take control in exchange for clearing the loans, possibly in the next few days.

Existing shareholders would see their stakes all but wiped out by such an agreement. However, New Star faces collapse if a deal is not struck.

The crisis represents a brutal fall from grace for legendary fund manager Duffield, who set up New Star in 2000 after having sold previous firm Jupiter Asset Management to Commerzbank.

It makes him one of the most high-profile victims of the credit crunch and meltdown in the financial markets.

One analyst said: "The only thing I can think is that they will be discussing a debt-for-equity swap."

Another, Sarah Ing of Singer Capital Markets in London, added: "It is difficult to see how much value will be left over for equity holders after the company restructures its debt. It is a heavily indebted company."

The shares today slumped to an all-time low of 4.11p before recovering slightly to stand down 6¼p at 7¾p. The stock has crashed 99% from a peak of 485p just 18 months ago, and the company is now valued at just £19.7 million.

New Star was also hit by the refusal of the UK Listing Authority to suspend its shares during the talks with its banks. Duffield asked the authorities for the shares to be suspended but was turned down on a day of high drama in the City.

The crisis raised fears that investors may look for a quick exit from New Star funds even though clients' money is ring-fenced within the funds, whatever happens to New Star shares.

The asset manager has been hit by the meltdown in financial markets and the wider economy, with the deepening credit crunch, the collapse in property values, and high debt levels all taking their toll. Assets under management fell to £14.3 billion last month from £19.8 billion at the end of June as investors pulled out their cash.

Trading in the flagship International Property Fund was suspended last week to head off a fire sale of assets, meaning investors could no longer withdraw money.

Chief investment officer Stephen Whittaker was axed in a major blow for a man regarded as one of the most successful fund managers of his generation. Last month, after a round of talks with lenders, New Star accepted tougher terms on its debt, including an increase of 1.5 percentage points on the interest rate it was paying.

The company was plunged into debt when it borrowed £300 million in the spring of 2007 to return cash to shareholders. Duffield got £45 million - three times its current market valuation.

New Star said: "Discussions with our bank syndicate are continuing and a further announcement will be made when the outcome of these discussions is known."