Panic swept through the banking sector today despite attempts by the authorities to draw a line under the turmoil in the financial sector.

Shares in Royal Bank of Scotland slumped almost 20% at one point while Lloyds TSB and HBOS were also sharply lower, as was Barclays. The share prices of Lloyds and HBOS moved so sharply that the market appeared to suggest that the £12bn rescue takeover of HBOS might fail.

A 14% fall in Lloyds TSB to 215.75p meant that its offer for HBOS was worth 180p a share. But HBOS was trading 10% lower at 155p. In more ordinary circumstances the share price of HBOS should be trading close to the offer price.

Royal Bank of Scotland was caught up in the uncertainty surrounding the partial privatisation of the Dutch-Belgian financial group Fortis, which has become the biggest continential European casualty of the credit crunch. But analysts insisted the association was unfounded. RBS, together with Fortis and Santander, bought the Dutch bank ABN Amro last year, leading to concerns that it was owed money by Fortis or would buy Fortis's stake in RFS Holding - the company set up to handle the break up of ABN Amro. Fortis was buying the retail banking assets of Fortis while RBS bought the investment banking arm.

But analysts at Cazenove stressed the reaction was overdone. Addressing the concerns in turn, Cazenove said: "1. Fortis has not paid for its share of ABN. This is clear nonsense ... RBS is responsible to the Dutch regulator for ABN. However the balance sheet of ABN is dominated by the businesses acquired by RBS and the addition of the retail/commercial bank operations make little difference to either risk or funding in our view.

"2. RBS will buy the Fortis shareholding in RFS Holdings. We regard the probability of RBS buying ABN's retail/commercial bank as low."

Analysts were mesmerised by the share price movement in Lloyds TSB and HBOS. James Eden, banks analyst at Exane BNP Paribas, said: "What's most remarkable is the HBOS share price which is at a 20% discount to the Lloyds offer. I'm trying to be open minded about other surprises there might be. Can you imagine Lloyds walking away from HBOS? I can't image they would. The share price is telling you there is a chance of that happening. It's an example of the market being too afraid".