Shares in UK buy-to-let mortgage lender Paragon Group slumped as much as 26% as fears deepened over the ability of banks to finance their loans.
UK mortgage lenders are suffering from the money market crisis
Investors rushed to cash in their Paragon shares after the Bank of England agreed to provide emergency funding to rival Northern Rock.
The Newcastle-based bank also warned that the "severe credit squeeze" would hit 2007 profits.
It is thought Paragon's loan book could also suffer, hitting its profits too.
A fifth of Paragon's value was wiped out by midday in London trade, but it recovered some of its losses later in the day to close at 298 pence, down 60 pence or 16.76%.
Analysts said that there was growing suspicion of companies that relied heavily on the money markets to finance their businesses.
A prime example is Northern Rock, which said on Friday that profits for 2007 were likely to be at least £100m lower than forecast as a result of the "credit and liquidity turmoil", though it insisted it would remain solvent.
But Paragon, based in Solihull, said new business flows were "fully accommodated" with a capacity to cover £1.8bn of new home loans into 2008 with agreed credit deals with a number of big banks.
In a statement, the firm added: "Paragon has no involvement in the US mortgage market nor any investment, directly or indirectly in US sub-prime mortgage securities, SIVs (structured investment vehicles), CDOs (collateralised debt obligations) or similar vehicle."
A Paragon spokesman insisted that the quality of the lender's loan book was "exemplary", blaming the collapse of inter-bank lending for the firm's share price woes.
Inter-bank lending has been virtually frozen as a result of record defaults and late payments on mortgages in the US taken out by lenders on low incomes or with poor credit.
They have been unable to keep up with their monthly repayments after successive interest rate rises.
This has caused havoc in financial institutions worldwide as many have invested in complicated debt instruments which have been hugely exposed to the lower end of the US housing market.
With no-one knowing yet how many banks have toxic loans festering on their books and the need for some to hold reserves to cover any bad debts, commercial paper has dried up.
Paragon Group is solely a mortgage lender with no deposit facilities, which means it is reliant on issuing debt supported by the interest income from its mortgages and credit deals with major investment banks for cash flow.
Analysts are confident over the firm's prospects in the short term, but the worry is that no one knows when the money markets will return to normal trading conditions and at what cost.
"It is able to pass higher funding costs onto borrowers, but there will be a timing lag," said Joanna Parsons, an analyst at ABN Amro, of Paragon's position.
"Plus, higher mortgages will reduce the attraction for landlords to buy, unless higher mortgage charges can be passed onto tenants."
All eyes will be on a trading statement to be issued by Paragon next week.