Shares in HBOS were sent crashing by more than12.5 per cent, equivalent to $3.4 billion, in a market that saw over $102 billion wiped off the value of blue chip shares.
Even the extra $10 billion of loans promised by the Bank of England to instil more confidence in the midst of the credit crunch was not enough to stop the FTSE 100 Index dropping to its lowest level in over two years.
It fell by 3.9 per cent, down 217.3 points at 5414.4, mostly due to banking stocks.
Barclays was the next worst hit British bank, with a nine per cent decline, which saw shares closing 90 cents down.
Royal Bank of Scotland shares lost eight per cent of their value, while shares in Alliance & Leicester had seven per cent shaved off their price.
This latest crash means that shares in all the top banks have come close to halving in the past 12 months.
The big four banks have been worst hit by the Bear Stearns fallout due to having the most exposure to sub-prime and structured products.