Mr Banks accused leader Paul Nuttall of "crashing the car" with his focus on Muslim issues over Brexit, and suggested that what the party now needed was "a strategic bullet to the back of the head".
UKIP loses 'Everything they've been trying to defend' in local electionsBoost for Theresa May as Labour suffers losses and UKIP crumbles at local pollsAfter a night in which Ukip saw huge segments of its support switch to the Tories as it lost all 30 of the council seats it was defending, Mr Nuttall insisted the party was "the victim of its own success" on Brexit.
Praising the party's candidates, he said: "It's been a difficult night. Frankly, there is nothing they could have done in the face of a big national swing to the Tories.
"Our electoral success over recent years was a key driver in forcing the Conservatives to embrace our cause under a new prime minister who was campaigning for a Remain vote in the referendum a year ago.
"Mrs May's public dispute with the EU in recent days - which led to her speaking about standing up to Brussels in an eve-of-poll statement in Downing Street - was particularly fortuitously timed for the Conservatives.
"If the price of Britain leaving the EU is a Tory advance after taking up this patriotic cause, then it is a price Ukip is prepared to pay.
"We are the victims of our own success and now we pick ourselves up and go on to further success in the future."
But Mr Banks said the leader had harmed Ukip's chances by launching his General Election campaign with a message on Muslim issues like a burka ban, instead of treating it as a second referendum on Brexit.
The millionaire, who funded the Leave.EU referendum campaign but ducked out of a proposed bid to become MP for Clacton, said pro-Brexit voters should now back "the most viable candidate" in the June 8 election.
"If we use the analogy of Ukip as a racing car, Nigel (Farage) was a skilled driver who drove the car around the track faster and faster, knowing when to take risks, delighting the audience," said Mr Banks.
"The current leadership has crashed the car, at the first bend of the race, into the crowd, killing the driver and spectators.
"As one of the Leave.EU team said to me: a strategic bullet to the back of the head."
And he added: "In this Brexit election, voters should use their power wisely and vote for the most viable candidate in the election.
"Ukip under the current leadership, without positive radical policies, is finished as an electoral force."
Ukip lost 10 seats in Lincolnshire, where Mr Nuttall has decided to run in the General Election.
Other losses included eight seats in Hampshire and six in Essex.
With just over a month to go before the General Election, elections expert Michael Thrasher said Ukip's share of the national vote could fall as low as 3% in the areas which went to the polls on Thursday, down from 22% when the same seats were contested in 2013.
Professor Thrasher told Sky News: "Ukip received one in eight votes cast at the 2015 general election, and therefore those votes are absolutely critical in a month's time at the General Election."
Politics professor John Curtice said Ukip "has lost everything they've been trying to defend".
In another blow, Ukip's top tier in Rotherham resigned in protest at the direction of the party and Mr Nuttall's leadership, the Yorkshire Post reported.
Meanwhile, MEP Steven Woolfe - who quit Ukip in the aftermath of an altercation with a party colleague - said he would back the Tories in the General Election.
Asked if he would vote for Mr Nuttall or Mrs May, the MEP told BBC 5 Live: "I've got no choice - it would have to be Theresa May.
"The darker forces within Ukip ... have managed to rise ... and that just won't work in the United Kingdom."