Shares in Royal Bank of Scotland collapsed today in the wake of the Government's latest rescue bid and news that the bank is facing the worst loss in UK corporate history.

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The NatWest parent company's market value slumped below £5 billion after shares plunged by as much as 70 per cent at one stage.

RBS estimated bad debts and write-downs on the value of past acquisitions could leave it as much as £28 billion in the red for 2008 - higher than the current record of £15 billion set by mobile phone group Vodafone in 2006.

It spooked investors further after admitting that more credit write-downs "seem certain", but was unable to say how much or when.

The warning overshadowed a second bank bail out unveiled by the Government to help the sector through the crisis and kick-start lending.

London's FTSE 100 Index slumped more than 2 per cent at one stage as the market gave a poor reception to the rescue plan.

RBS was the worst hit in the sector as the prospect of potential full nationalisation loomed large.

The bank will be about 70 per cent Government owned after the Treasury agreed to replace £5 billion of preference shares with new ordinary shares.

But the taxpayer is already sitting on paper losses of more than £12 billion on its existing 58 per cent stake in the group.

Other bank stocks also plunged in the sell-off, with the newly created Lloyds Banking Group shedding more than 30 per cent in a poor start to life after the merger of Lloyds and HBOS.

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The group is minority owned by the State and is not currently set to follow RBS with a preference share swap.

Barclays and HSBC, the only major high street banks not yet to receive state aid, also fell heavily, seeing double digit falls.

Price movements were so marked in stocks such as RBS that they triggered price monitoring measures throughout the session, according to the London Stock Exchange.

The Footsie had risen in early trade, but fell back sharply as the City digested implications of the bank rescue and RBS losses.

David Fineberg, chief dealer at CMC Markets, said: "There is now mounting concern that the bail outs will indeed prove to be unsustainable given the sheer extent of the losses that are being talked about and also the fact that there's little confidence that the exact size of the toxic debt pool has been fully realised yet.

"RBS is clearly sitting very much in the middle of this, hence the reason its shares are down so heavily, and overall this is simply going to encourage the nervous mood as we edge towards the bank reporting season next month."

RBS said a review of past acquisitions, most notably its share of Dutch bank ABN Amro, would result in a non-cash hit of between £15 billion and £20 billion. It also expects core losses of between £7 billion and £8 billion as a result of credit and market conditions in the fourth quarter of the year.

Asked about the record losses, Prime Minister Gordon Brown voiced his anger about the bank's decision-making, in particular international investments "that were clearly wrong investments".

He added: "Today's write-off by the Royal Bank of Scotland is for irresponsible losses accumulated in American sub-prime markets that partly derive from the acquisition of the Dutch bank ABN Amro."

However, he refused to say whether action should be taken against former chief executive Sir Fred Goodwin or other senior figures over "irresponsible" behaviour.

The Government's increased stake in RBS will help the bank to lend more by removing the annual cost of preference share dividends of £600 million and is expected to bolster the group's cashflow.

RBS said it intended to increase lending across its UK businesses by £6 billion, extending the lending commitment it gave in October in respect of UK mortgage and corporate customers.

It added that its retail and commercial banking businesses in the UK remained profitable, offset by losses in its global banking and markets division.

The group owns the Citizens commercial bank in the US and has a large investment banking presence in America, while it also operates across Asia and provides a wealth management service, through its private bank Coutts.

It gained a chunk of ABN Amro's European and global assets when it led a consortium takeover of the Dutch bank last year.