More than £6 billion was wiped from the value of Standard Chartered on Tuesday after the banking giant was accused of hiding 250 billion US dollars (£160 billion) of transactions with the Iranian government.
In the latest blow to the reputation of a UK-based bank, regulators in New York said Standard was a "rogue institution" which broke sanctions imposed on Iran, exposing the US to terrorists, drug kingpins and weapon dealers.
Standard, one of the top five largest banks in the UK by market value, said it "strongly rejects the position or the portrayal of facts" set out in the order by the New York state's Department of Financial Services.
However, its shares slumped by 18% on Tuesday on top of the 6% decline after the accusations were made just before the close of the London market yesterday.
Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, said: "There is some irony that, a few days after describing its approach as 'boring' at its interim results, Standard Chartered should become embroiled in yet another potential banking scandal.
"The allegations serve to add more risk to an already beleaguered sector."
The investigation's findings come after fellow British bank HSBC was accused of allowing drug cartels and rogue states to launder billions of pounds through its US arm.
The bank, which employs nearly 90,000 people worldwide and is primarily focused on Asian markets, has been called to appear before regulators on Monday to explain the apparent violations and defend its licence to trade on the New York Stock Exchange.
In its findings report, the regulator said: "In short, SCB (Standard Chartered Bank) operated as a rogue institution."
The findings include a memo sent in October 2006 from the bank's US chief executive to the group executive director in London raising concerns about the activities with Iran.
He said: "Firstly, we believe (the Iranian business) needs urgent reviewing at the group level to evaluate if its returns and strategic benefits are ... still commensurate with the potential to cause very serious or even catastrophic reputational damage to the group."
He added: "Secondly, there is equally importantly potential of risk of subjecting management in US and London (for example you and I) and elsewhere to personal reputational damages and/or serious criminal liability."
To which the group executive director allegedly replied: "You f****** Americans. Who are you to tell us, the rest of the world, that we're not going to deal with Iranians."
The regulator claims that between January 2001 and 2010, Standard Chartered conspired with Iranian clients to route payments through New York after first stripping information from wire transfer messages used to identify sanctioned countries.
The bank moved the transactions through its New York branch on behalf of Iranian financial institutions that were subject to US economic sanctions, and then covered up the dealings, the banking regulator claimed.
The institutions included the Central Bank of Iran, as well as Bank Saderat and Bank Melli, both of which are also Iranian state-owned institutions.
A statement from Standard Chartered said: "As reported previously, the group is conducting a review of its historical US sanctions compliance and is discussing that review with US enforcement agencies and regulators.
"The group cannot predict when this review and these discussions will be completed or what the outcome will be."
The Central Bank of Iran approached Standard Chartered Bank in early 2001 to act as its recipient bank for US dollar proceeds from daily oil sales made by the National Iranian Oil Company.
The bank's group legal adviser counselled several of its officers and advised that "our payment instructions (for Iranian clients) should not identify the client or the purpose of the payment", the regulator said.
Standard Chartered then "conspired" with Iranian clients to transmit misinformation to the New York branch by removing and otherwise misrepresenting wire transfer data that could identify Iranian parties, the watchdog said.
The bank achieved this by inserting phrases such as "NO NAME GIVEN" or "NOT STATED" in place of requested information that would identify Iranian clients.
In conclusion, the regulator said: "Motivated by greed, SCB acted for at least 10 years without any regard for the legal, reputational, and national security consequences of its flagrantly deceptive actions.
"Led by its most senior management, SCB designed and implemented an elaborate scheme by which to use its New York branch as a front for prohibited dealings with Iran - dealings that indisputably helped sustain a global threat to peace and stability."
The banking industry is engulfed in scandal including the Libor-rigging affair exposed at Barclays, which is likely to spill over to most major banks, spiralling penalties for mis-sold payment protection insurance, and complex interest rate swaps and money-laundering accusations at HSBC.