Ongoing liquidity concerns hit banking shares when the stock market opened this morning.

By 09:33 GMT the FTSE 100 was down 53.50 points, or 0.95 per cent, to 5,592.1 points.

HBOS shares dived in value by 8.85 per cent, Alliance & Leicester dropped 3.98 per cent, HBOS was down by 3.45 per cent and Barclays fell by 2.3 per cent from yesterday’s close.

Britain’s biggest mortgage lender, HBOS, was hit particularly hard by market rumours that it has turned to the Bank of England for emergency funding.

“This is complete and utter nonsense,” HBOS general manager of group communications Shane O’Riodain told Thomson Financial News.

“HBOS is one of the world’s strongest financial institutions, with one of the world’s strongest balance sheets,” he added.

The index had soared in the previous session, on hopes the US Federal Reserve would cut interest rates, which would ease the cost of lending.

Better-than-expected results from two Wall Street banks, Goldman Sachs and Lehman Brothers, also helped boost share prices last night.

In Asian markets, the US interest rate cut of 75 basis points to 2.25 per cent helped raise share prices for manufacturers.

Japan’s Nikkei share average rose 2.5 per cent, while Hong Kong stocks gained more than two per cent.