Shares in Lloyds Banking Group and Barclays fell heavily on Tuesday as concern resurfaced they may need state help to repair balance sheets hit by deepening economic gloom, dealers said.
Europe's banking index fell to a 14-year low as stocks fell on fears that lenders will need more state help to raise capital as economies sink into recession and bad debts rise.
By 1140 GMT, Lloyds shares were down 25 percent at 48.6 pence, after sinking to 33.8p, their lowest level for more than 20 years.
Barclays lost 9.8 percent at 79.7p, after hitting a 17-year low of 70.5p.
"Fear is driving the market," one dealer said. "…there's going to be more bad news coming and the government stake could go higher (in Lloyds), or do you even nationalise them," he added.
A spokesman for Lloyds said these were "difficult times for the entire banking sector" but the bank had "a robust capital position" and it issued a clear trading update only on Monday.
"In that update, we noted that Lloyds has continued to trade satisfactorily since the previous update in November and December," said Shane O'Riordain, spokesman for Lloyds.
Barclays declined to comment.
Other European banks were sharply lower and by 1200 GMT the DJ Stoxx European bank index was down 4.4 percent at 118.6 points. It hit 117.6 points, its lowest level since 1995.
Belgian banking and insurance group KBC fell 13 percent on worries that it will need more government cash.
KBC, which received a 3.5 billion euro ($4.6 billion) cash injection in October to boost its capital, has almost halved in value in the past week on concern it needs to write down more on its collateralised debt obligations (CDO) portfolio and will need more capital.
France's BNP Paribas lost 8.3 percent to 25.1 euros as it is also seen as one of Europe's banks most in need of raising funds, analysts said.
Credit Suisse was down 7.1 percent and Societe Generale fell 6.2 percent.
Royal Bank of Scotland was one of the few gainers, bouncing back after losing two-thirds of its value on Monday after a record loss prompted Britain to increase its stake in the bank to 70 percent, shaking confidence across the sector.
RBS shares were up 12 percent at 13p.
Investors and analysts said there is a real threat of nationalisation and more writedowns and bad debts, outweighing any attraction of historically very low valuations.
"Investors in UK banks are in a binary position," said Bruno Paulson at Bernstein, saying they face being wiped out through nationalisation or significant upside if the company survives to reap high returns from a concentrated market.
"While the risk of nationalisation is real, particularly at RBS … the chance of survival does look distinctly higher than the 10-20 percent implied at RBS and the 25-40 percent implied at Barclays given the current share prices," Paulson said in a note.
