HBoS fell by 663/4p to 94p, while NatWest owner RBS dived 581/8p to 90p, wiping around £10bn off its market value. Barclays and Lloyds TSB were also down by 9 per cent and 13 per cent.

The slumps pegged back Footsie gains to 16.03 points, taking the index to 4605.22, as energy and wider stocks bounced back following Monday's massive
sell-off.

The banking sector woes stemmed from speculation the Government was considering taking some hefty stakes in banks to shore up their balance sheets, diluting other shareholder investments as a result. It also came as the banking crisis deepened in Iceland with the collapse of one of its biggest institutions, Landsbanki.

HBoS topped the Footsie fallers' board, with RBS close behind. HBoS's own funding woes have already seen it agree to a takeover by Lloyds TSB, while RBS is seen as being among the most vulnerable to a European banking meltdown.

Lloyds TSB slumped 331/2p to 2251/2p, with Barclays down 29p to 285p.

HSBC, which is much less exposed to the UK and Europe compared to its rivals, saw its shares rise 19p to 901p.

It wasn't all misery in the financial sector, with insurers such as Standard Life in better shape after Monday's heavy falls. The company's shares were ahead by 23p to 255p.

Mining stocks also staged something of a recovery, with risers including Vedanta Resources, up 101p to 1005p. Eurasian Natural Resources firmed 343/4p to 4593/4p.

Oil prices ticking up a few dollars from the sub-90 dollar lows overnight appeared to have given a boost to the likes of BP and Royal Dutch Shell. BP added 171/2p to 4471/4p, and its rival rose 47p to 1526p.

But there were heavy losses for British Airways, as investors fretted about its trading outlook and the size of its pension fund deficit. Shares were down by 163/4p to 1281/4p.

Consumer product firms were doing well, with Guinness owner Diageo up 45p to 882p, Kingfisher 8p higher at 1403/4p and Cadbury 9p stronger at 534p. Unilever added 44p to 1565p.

A quiet session for corporate news saw Northern Foods decline 11/4p to stand at 591/4p despite posting a resilient half-year trading update. It said it was on track to deliver full-year profit in line with expectations, with sales up 6.5 per cent in the first half.

Shares failed to rise as broker Citi said it remained cautious about trading prospects.

Elsewhere in the second tier, the finance sector woes were reflected by a hefty fall for price comparison website moneysupermarket.com. Shares were down 11/2p to 58p.

The Footsie's four biggest risers were Friends Provident, Vedanta Resources, SABMiller lifted 99p to 1033p and Standard Life.

The biggest fallers were HBoS, RBS, Lloyds TSB and British Airways.