The full extent of the crisis at HBOS was laid bare today when Lloyds Banking Group admitted that the Halifax owner lost about £11 billion last year.

Lloyds rushed out a grim trading statement to the Stock Exchange that confirmed what many in the City have long feared - the rescue of HBOS by Lloyds TSB at the height of the banking crisis will come at a very heavy price.

Lloyds, now 43%-owned by the taxpayer following the merger and £17 billion of Government support, blamed tumbling asset prices, the ongoing freeze in the credit markets, and "increasingly difficult market conditions".

Shares in Lloyds sank on the news, losing 35.9p, or 40%, to 55p.

Other banks followed suit, with Royal Bank of Scotland, now 68%-owned by the taxpayer, down 1.7p at 22.3p.

Lloyds said HBOS made an underlying loss of £8.5 billion but this widened to some £11 billion after other factors such as goodwill write-offs were included. Some £7 billion of losses came in the HBOS corporate division led by Peter Cummings.

The losses - compared with a profit of £5.7 billion in 2007 - will increase speculation that outright nationalisation of the UK banking sector is inevitable.

Some City analysts argue that it would be better to take the High Street banks into national ownership sooner rather than later, saying this will make it easier for the recovery to begin.

Public anger at the damage wrought by banks has been growing for months.

This week, the Commons' influential Treasury Select Committee hauled in several top bankers for questioning, including former HBOS chief executive Andy Hornby and Lloyds boss Eric Daniels.

Daniels today said: "HBOS's 2008 results have been adversely affected by the impact of market dislocation, which accelerated significantly in the last quarter of 2008, and the additional impairments required on the HBOS corporate lending portfolios.

"These impairments primarily reflect the application of a more conservative recognition of risk and the further deterioration in the economic environment.

"Whilst we recognise that the short term outlook is more challenging, Lloyds has the largest UK financial services franchise, with excellent long-term earnings potential.

"The group is already making good progress in integrating the two businesses."

Lloyds said it expected the Lloyds TSB business to make profits of £1.3 billion.

David Buik at BCG Partners said: "The HBOS loss is a lot more than we thought it would be and Lloyds' own position is worse than we thought. The numbers are messy. It's not surprising the market didn't like it."