Shares in HVB, Germany's second-biggest bank, have plunged to their lowest level in more than 20 years, as investors panicked over its financial solidity.
HVB insists it needs no help
HVB's shares dropped by 15%, amid market rumours that it might seek billions of euros of fresh financing in the form of a new share issue.
German banking officials did their best to soothe tattered nerves, insisting that it had sufficient funds to operate without problems.
But confidence in Germany's major banks is at a low ebb, and there is increasing speculation that some form of state bail-out may be necessary.
In the past weeks, both HVB and Commerzbank, Germany's third-biggest bank, have unveiled heavy net losses for 2002.
Chorus of support
Bundesbank board member Edgar Meister said in a statement there was no need for HVB to raise capital.
"From the Bundesbank's point of view, HVB has taken
appropriate steps to strengthen its business a while ago and is on the right track in my opinion," he said.
In what seems a coordinated move, bank regulator BaFin said there was no regulatory reason for a capital hike from HVB.
HVB has been reportedly planning a "mandatory convertible bond", a type of loan that buyers are forced to convert into shares - effectively, a delayed rights issue.
Such bonds are rare - only Deutsche Telekom has launched one so far in Germany - because companies are wary of the danger signals they send out to jumpy investors.
Investor nervousness over German banks is at fever-pitch.
Chancellor Gerhard Schroeder met top bankers this month to discuss financial markets - a meeting some say aimed to hammer out an emergency rescue plan.
Leading banks such as HVB, Commerzbank and market leader Deutsche Bank have been battered by a wave of failures among borrowers and by feeble financial markets - especially the German stock market, one of the worst performers in the world last year.
HVB ended last year with a core capital ratio - a key measure of financial stability - of 5.6%, below the 6% usually seen as obligatory.
Chief executive Dieter Rampl has pledged to return that ratio to 7% this year, and to drag HVB back into the black.
He aims to do this by spinning off HVB's commercial property arm into a new bank, and says this could be achieved without raising new equity.