Market doubts were growing over the terms of Lloyds TSB's planned takeover of struggling Halifax Bank of Scotland (HBOS).
HBOS's shares fell 12% and have lost more than half their value in the past two weeks - raising concerns over whether the deal will have to be repriced to gain the approval of Lloyds TSB shareholders.
Meanwhile, fears over the derailing of the 700 billion US dollar (£388bn) banking bail-out for US financial institutions also weighed on bank stocks.
Lloyds has offered 0.833 of its own shares - currently equivalent to 187p - for every HBOS share in a deal valuing the lender at £9.8 billion.
But HBOS shares were trading 33% below this at around 125p, raising questions over whether the takeover would be waved through as it currently stands.
Alex Potter, Collins Stewart banking analyst, said: "The market is implying that (the deal) does not happen."
Numis Securities analyst Gurgit Kambo added: "There are clearly some concerns. The uncertainty is if shareholders vote against it, then it won't go through."
An HBOS spokesman shrugged off the concerns. He said: "This is the right deal for HBOS shareholders. We are already working on the integration planning process and it is full steam ahead as far as we are concerned.
"Share price volatility in bank stocks is part of the menu at the moment. These are not normal times."
If the deal goes ahead, it will create a "mega-bank" with nearly a third of the UK mortgage market and more than £300 billion of deposits. It will also have around 3,000 branches, leapfrogging industry titan Royal Bank of Scotland's 2,300 sites and dwarfing HSBC, which has around half.
