Lloyds shares have plunged almost 40 per cent after it revealed HBOS, which it rescued last year, will post a massive £10 billion loss.
The huge writedown includes a £7 billion loss by HBOS's corporate division which is heavily exposed to hard-hit housing and commercial property sectors.
On Tuesday, Sir James Crosby, an ex-chief executive at HBOS, quit as deputy chairman of the Financial Services Authority (FSA) over claims that he sacked a senior risk manager who had warned the bank was "going too fast". He denies the allegations.
The expected writedowns contrast with a £5.71 billion underlying profit made by the bank in 2007.
sent shares in Lloyds Banking Group - 43 per cent-owned by the taxpayer - almost 40 per cent lower despite Lloyds TSB saying it will make pre-tax profits of around £1.3 billion.
Chief executive Eric Daniels said: "HBOS's 2008 results have been adversely affected by the impact of market dislocation, which accelerated significantly in the last quarter of 2008, and the additional impairments required on the HBOS corporate lending portfolios."
He added: "These impairments primarily reflect the application of a more conservative recognition of risk and the further deterioration in the economic environment."
Market confidence in HBOS collapsed last autumn and the Government waived competition rules to allow the bank to be taken over by Lloyds TSB, creating a UK "super-bank".
The taxpayer has pumped a total of £17 billion into the two banks to shore up their balance sheets.
Despite the surprise warning, Mr Daniels said the group had a capital position "significantly in excess" of its regulatory requirements.
He said: "Whilst we recognise that the short-term outlook is more challenging, Lloyds Banking Group has the largest UK financial services franchise, with excellent long-term earnings potential."
The HBOS News
comes a month after Royal Bank of Scotland, which is 68 per cent owned by the taxpayer, warned of annual losses of up to £28 billion on the back of a sharp rise in bad debts and a writedown of up to £20 billion over the disastrous acquisition of Dutch bank ABN Amro at the top of the market in 2007.
The banks' fortunes are in comparison with Barclays which earlier this week posted pre-tax profits of £6.14 billion for 2008, down just 14 per cent on 2007 and better than expected by the City. THE ITN NEWS