Rumours the UK's biggest mortgage lender, Halifax Bank of Scotland, had approached the Bank of England for emergency funding sent London markets into freefall yesterday.
Panic gripped traders when the rumours surfaced and at one stage HBOS shares fell 20 per cent.
The Bank of England made the unprecedented step of denying the rumours and the turmoil prompted City watchdog the Financial Services Authority to wield the big stick by saying it would come down hard on any traders found guilty of spreading lies.
The BoE's own assurances together with strong denials from HBOS helped to soothe nerves - but by then the damage had already been done.
The FTSE 100 Index fell by more than one per cent, closing 60.2 points down at 5545.6. Although HBOS recovered it still closed more than seven per cent down at 446.25p, a drop of 34p.
The turmoil had a knock-on effect on the currency markets and the pound dipped to $1.98 against the dollar and hit a record low against the euro.
The BoE's intervention was seen as significant and an indication of how jittery the markets are at the moment.
Analysts said it showed that the policymakers were having to keep an increasingly watchful eye on the situation.
Deputy governor John Gieve, whose remit is financial stability, had been due to give a speech today but was replaced by another of the central bank's policymakers so he could stay in London to monitor market developments.
Governor Mervyn King earlier this week cancelled a meeting with Coventry and Warwickshire Chamber of Commerce so that he could stay and monitor the situation, while fellow deputy Rachel Lomax also called off a regional visit as market fears heightened after the forced rescue of US investment bank Bear Stearns.
However, a BoE spokesman said rumours that Mr King and other senior executives had cancelled a trip to the Far East due to a possible problem were "complete fantasy", as were claims that all Easter leave had been cancelled.
They also said that a meeting today between Mr King and the banks had been arranged last week and was to discuss new regulatory arrangements rather than anything more serious.
The turmoil followed a positive start to yesterday's trading with confidence high after the US Federal Reserve's decision to cut interest rates again for the second time in three days.
But the optimistic mood did not last long and falls in London were later mirrored in New York where the Dow Jones Industrial Average on Wall Street was off more than 100 points in early trade.
Even news of better-than-expected first quarter results from US investment bank Morgan Stanley failed to lift spirits.
As the crisis deepened, Chancellor Alistair Darling moved to reassure investors that the UK's economic growth plans remained on track.
His comments followed a newspaper article by Prime Minister Gordon Brown in which he admitted that Britain was going through a "period of uncertainty" but said Labour had helped the economy through tough times in the past and would do so again.
He wrote: "Our task is to steer a course of stability in uncertain times.
"When a major bank in America has to
be rescued over a weekend and billions are wiped off share markets across the world, I understand that people are worried about the future."
Richard Smith, regional director at stockbroker WH Ireland in Birmingham, the mood of uncertainty was stalking the market.
"The banks won't lend to each other or the public at large and as a result there is a vicious circle of stagnation," he said.
"Until this crisis of confidence is restored the markets will continue to drift. With the housing market affected by
lending as well, many people will feel the affects. First time borrowers will find it harder to get a mortgage and there will be more repossessions."
He said that panicking would only make the situation worse and that people needed to hold on tight to their investments and have faith that, in the long term, the market would recover.
"The really brave may see this time as an opportunity," he said. "If they call the bottom of the market and reinvest in equities they could well reap the rewards in the long run."