The warning came as Hyder, owner of Welsh Water and Swalec, announced a 60 per cent cut in its dividend and 1,000 job losses. Pennon, the owner of South West Water, added to the gloom across the sector by unveiling 200 job losses and a 25 per cent dividend cut for next year.
A wholesale break-up of Hyder would spell a humiliating defeat for its multi-utility strategy and put the chief executive, Graham Hawker, under intense pressure to quit.
However, Mr Hawker indicated yesterday that he had no intention of resigning, nor had the subject been raised by shareholders. "I like gardening, but I don't intend to take it up full-time" he said.
A strategic review of the group, being carried out by Dresdner Kleinwort Benson and JP Morgan, is due to be completed early in the new year. It will look at all options, including the scale of the rights issue and the extent of the disposals necessary to reduce Hyder's pounds 1.6bn debt mountain and rein in gearing of 190 per cent.
"We will look at everything," said Mr Hawker. "A disposal of Swalec will be on the list, among other things. If it is in shareholders' interests, we would do it."
Mr Hawker denied that disposing of Swalec, bought for pounds 821m in 1996, would amount to an admission of defeat. On the contrary, it would be a demonstration of "management action," he said. "I believe the multi-utility strategy has worked well. We have met all our targets, but we found ourselves with a balance sheet that cannot support all of the business."
He said that the regulatory regimes governing water and electricity had changed in a way that no one could have forecast, while the regulators themselves had "changed the goalposts".
Cuts in water and electricity bills next year will reduce Hyder's profits by pounds 70m, while it is facing a capital investment programme of pounds 1.7bn, of which pounds 1.3bn will be in Welsh Water.
The scale of the price curbs would have left Hyder's dividend barely covered by profits next year had it not taken the decision to slash the payout. Interest cover, meanwhile, is hovering uncomfortably close to the levels at which Hyder would be in default of the banking covenants in its loan agreements.
Hyder is also facing the prospect of the Welsh Assembly and the Environment Agency ordering an even bigger environmental programme than that which the water regulator, Ian Byatt, factored into his price review.
For that reason, Hyder said it would not be able to take a decision on whether to appeal to the Competition Commission over Mr Byatt's final price determination until January.
The grim news from Hyder and Pennon sparked a second successive day of heavy falls in water shares. Hyder fell 12.5 per cent to 308p, but Pennon was the most severely penalised, its shares tumbling 32 per cent to 497p. Analysts had not expected it to reduce its dividend, but Ken Harvey, the chairman, said it had no option faced with price cuts that would slice pounds 35m off profits next year and lower-than-expected profits growth in its non-regulated waste and contracting businesses.
Robert Miller-Bakewell, utilities analyst at Merrill Lynch, cut his ratings on half a dozen water stocks, including Anglian, Severn Trent, Pennon and Hyder, and said that water shares probably had a further 10 per cent to fall from their current levels.