Royal Bank of Scotland shares battered again

Royal Bank of Scotland was the biggest victim on another day of turmoil for banks today amid mounting speculation that the Government is set to spend billions on a taxpayer-funded rescue of the ailing sector.

RBS was down 40 per cent at one point - with big falls for HBOS, Barclays and Lloyds TSB - following crisis talks with Chancellor Alistair Darling last night.

But in an attempt to calm market nerves, RBS said: "Contrary to press speculation, RBS did not make a request to Government for capital."

And by early afternoon the fall RBS shares had eased to a 20 per cent decline on the day. HBOS shares were down 13 per cent.

Meanwhile, Iceland nationalised its second-biggest bank Landsbanki - leaving UK savers in limbo as its Icesave online website was frozen.

The wider FTSE 100 Index was nearly three per cent higher after yesterday's 7.8 per cent slump - the biggest since Black Monday in October 1987 - as commodities bounced back slightly from the fall and oil prices rose.

The RBS stock slumped after Sir Fred Goodwin and his rival bosses at Barclays and Lloyds TSB met Chancellor Alistair Darling last night - with a possible capital injection for the sector reportedly on the agenda.

The concerns caused a fresh spike in money markets as fearful banks refused to lend to each other.

The overnight lending rate, which should be virtually the same as the official 5 per cent base rate in normal conditions, jumped more than 0.75 per cent to 5.84 per cent. Three month rates - used to price mortgages - widened to 6.28 per cent.

Alongside RBS's falls, HBOS was down 14 per cent and Lloyds TSB 7 per cent lower. Barclays also registered big losses but recovered slightly to 4 per cent down after denying it had called for fresh capital.

The BBC reported RBS, Barclays and Lloyds TSB needed around £15bn of extra capital each.

A spokeswoman for Lloyds TSB refused to comment on whether any discussions were taking place with the Government.

"We never comment on any discussions that may or may not have taken place with the Government," she said.

The banks at the meeting called for the Chancellor to act quickly but Mr Darling did not have a fully-prepared rescue plan, the BBC said.

Bank of England Governor Mervyn King and the new chairman of the Financial Services Authority, Lord Turner, were also at the meeting, although the Treasury declined to comment.

There has been speculation that Mr Darling is considering moves to shore up UK banks with taxpayers' cash, but he did not give any firm commitments when he addressed MPs yesterday.

He said "all practical options must remain open" for dealing with the crisis, but added that it would be "irresponsible" to give a running commentary on plans.

London's leading shares started today's trading with some solid gains, but the Footsie lost its momentum amid the banking sector woes.

They deepened in Iceland today, where the Government stepped in to save another of the country's major banks, Landsbanki under sweeping new powers which came into force yesterday - amid warnings that the entire country could go bankrupt.

It is the second nationalisation in little more than a week after ministers were involved in a rescue of rival Glitnir.

The wider Footsie made modest gains - mostly driven by a recovering oil price which bounced back slightly after hitting an eight-month low yesterday. Oil giants BP and Royal Dutch Shell both advanced around 4 per cent.