Credit Suisse has suspended a "small number" of traders suspected of inflating the value of mortgage-backed bond investments by $2.85bn (£1.5bn).
The global lending crisis is still causing pain for banks
The Swiss firm blamed pricing errors for its actions, which would cut $1bn from expected first-quarter profit.
It also blamed "adverse market conditions" for the write-down.
The news comes as confidence in the global banking sector is at its lowest ebb in years, hurt further by a trading scandal at France's Societe Generale.
The disclosure came after an internal review, which the bank said was continuing.
In a conference call, the firm's chief executive, Brady Dougan, blamed most of the losses on negative sentiment in the market.
But he also pointed to "late marking" - the failure to update pricing within the required time limit to reflect market movement.
He declined to comment on whether the traders involved had kept their positions inflated to bump up their bonuses, but would not rule out fraud.
'Tip of the iceberg'?
Tuesday's revelations by Credit Suisse stunned many analysts because they came a week after the Zurich-based firm posted its results for the last three months for 2007.
At the time, it reported minimal damage from the US sub-prime crisis, with losses of 2bn Swiss francs ($1.8bn; £938m) last year, less than it had originally expected.
"This is a disaster. This could be the tip of the iceberg," said Helvea analyst Peter Thorne.
Mr Dougan said there was "no indication" that Credit Suisse would have to restate 2007 earnings, which it reported last week, but he added, "That is under review."
He also said the bank was profitable for the quarter to date and that it was "extremely well capitalised".
Bear Stearns analyst Christopher Wheeler was sceptical.
He said: "Given the tentative nature of the announcement, it is not certain that we have heard the last of this issue."
"Those who thought that certain banks such as Credit Suisse were 'out of the woods' should exercise caution," he added.
The revelation cast a cloud over the banking sector in Europe, which has fallen out of favour with investors since last summer, when it began to emerge how much risk banks had taken on in the boom time.
Huge bets on the growth of the US housing market have turned spectacularly sour as the US weathers its worst slump for two decades.
Swiss banking giant UBS has been one of the worst European banks affected. Taking an $18bn write-down on investment losses, it recently posted the first annual loss since it was created by a merger a decade ago.
Wall Street giants, including Merrill Lynch, Citigroup and Morgan Stanley, have all experienced problems, and were forced to turn to cash-rich Asian and Gulf investors for help to rebuild their balance sheets.
Questions have also been raised about the risk controls at banks after illicit trades at Societe Generale cost it 4.9bn euros.
These concerns will come to the fore once more after Credit Suisse's announcement, analysts say.
On Tuesday, Credit Suisse shares suffered their biggest fall in five years, and were recently trading 7.1% lower at 52.7 Swiss francs.