Fears over the potential for multi-billion pound fines and damages from the industry's rate-rigging scandal sent banks' shares tumbling on Thursday.
Barclays plunged as much as 17%, wiping about £4 billion from its market value, as concerns mounted that the £290 million fines imposed on the bank could be dwarfed by the cost of lawsuits.
The shockwaves were felt throughout the sector as speculation suggested the interbank lending rate scandal was set to engulf other British banks.
Royal Bank of Scotland dropped 12%, Lloyds Banking Group fell 7% and HSBC was 4% lower.
Analysts at Killik & Co agreed the interbank probe was likely to pull in other UK banks, but said Barclays should be able to withstand multibillion-pound damages.
They said: "Some estimates are that potential damages could run into the several billions of dollars, certainly damaging to Barclays but not too significant in the context of core tier one capital of £43 billion and annual net income over £3 billion."
The interbank lending investigation is the latest blow to the reputation - and shares - of Britain's banks, coming just days after RBS suffered an embarrassing computer crisis.
Last week most of the major players also suffered a ratings downgrade by agency Moody's and the sector is also reportedly facing a formal investigation over the sale of complex interest rate swaps to small and medium-sized businesses.
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