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Shares in HBOS fell sharply yesterday afternoon on the London Stock Exchange, dropping below the rights issue price set by the lender.

The company – which owns Halifax and Bank of Scotland (BoS) – issued a statement at 15:30 BST yesterday. However, the move failed to significantly bolster confidence in the company.

Shares in HBOS slumped to 262 pence in early afternoon trading amid a general fall in the sector. This is well below the rights issue price of 275 pence per share.

"Further to its statement dated June 1st 2008, HBOS confirms that it's fully underwritten rights issue is proceeding according to plan and that it will issue a prospectus and detailed trading update week beginning 16th June 2008," read a HBOS statement.

"Current trading and specifically mortgage arrears performance, is in line with the Group's expectations."

Investors will now await the release of the company's prospectus next week, which will detail the organisation's capital raising potential.

The fall could place underwriters Morgan Stanley and Dresdner Kleinwort Group in a sticky financial situation.

The duo guaranteed the sale of 1.5 billion shares at 275 pence in April, and could now be forced to buy stock in the company at a loss.

HBOS, however, was not the only organisation to see red.

London blue chip banks Alliance & Leicester and Royal Bank of Scotland (RBS) also experienced heavy falls, off eight and seven per cent respectively.

At 08:06 this morning shares in HBOS were trading at 260.50 pence – still well below the rights issue price.