A 31 year old man has been arrested by City of London Police on suspicion of fraud in connection with the alleged rogue trading incident that has cost Swiss bank UBS around $2bn (£1.3bn).

The Zurich-based bank uncovered the incident as recently as the last 24 hours and suffered a near 10% fall in share price in early trading after it revealed the loss could push the bank into the red for the current financial quarter.

The City of London Police arrested a 31 year old man at 3.30am in Central London on "suspicion of fraud by abuse of position". He remains in police custody and the force has begun an investigation .The Financial Services Authority, the City regulator, is understood to have been informed of the incident.

In a brief statement, UBS said that was still trying to get to the bottom of the matter, which was announced on the third anniversary of the collapse of Lehman Brothers.

"UBS has discovered a loss due to unauthorised trading by a trader in its investment bank. The matter is still being investigated, but UBS's current estimate of the loss on the trades is in the range of $2bn. It is possible that this could lead UBS to report a loss for the third quarter of 2011." It added that "no client positions were affected".

UBS refused to say where the trader is based, or give any further detail about how the loss was incurred.

UBS's headquarters are in Zurich, but the bank operates in many financial centres, including the UK where it employs around 6,000 people, largely in the City.

Banking experts said the loss was a major blow to UBS's reputation, and that of the wider financial sector.

Simon Ballard, senior credit strategist at RBC Capital Markets, said the trading loss would add to public concern over the banking sector.

"At a time of greater regulation, it will raise questions about regulatory capital and whether ringfences are in place to stop this happening," Ballard told Bloomberg TV.

ZKB trading analyst Claude Zehnder told Reuters that UBS bankers "obviously have a problem with risk management".

"Even when the amount isn't so high it is once more a loss of confidence that casts UBS in a poor light," he said.

Last month, UBS announced plans to cut 3,500 jobs as part of a £1.5bn cost reduction plan.

It suffered huge losses during the financial crisis, but returned to profit in February 2010.

The cost of insuring UBS's debt against default rose by around 7% on Thursday morning, according to Gavan Nolan of Markit, before dropping back as traders digested the implications of the loss.