Shares in housebuilder Taylor Wimpey have more than halved in value after the firm said it had failed to secure extra funding and was to cut 900 jobs.
Taylor Wimpey had been expected to announce a deal to raise about £500m.
The firm said it had seen UK housing reservations drop 45% in the first half of the year, and added it would close a third of its 39 regional offices.
It said it expected the UK housing market to remain weak in 2008 and did not anticipate any short-term recovery.
The company's finance director, Peter Johnson, is to leave at the end of the year.
"Our major markets are experiencing a significant downturn, characterised by significantly lower weekly sales rates and lower average selling prices than in recent years," the company said.
Taylor Wimpey's share price was hammered in response to the update, dropping by as much as 57%, or 34 pence, at one point to 26p.
It recovered slightly to close down 41%, or 25 pence, at 35p.
Shares in other housebuilders also suffered, with Barratt Developments down 30%, Persimmon 17.6% lower and Bellway dropping 9.4%.
There was further gloomy news for the sector from the Royal Institution for Chartered Surveyors (RICS), which said that the building of new homes had fallen at the fastest pace since 1995.
Taylor Wimpey had announced on Monday that it was planning to raise funds to bolster its finances.
"However, in light of current market conditions we have not been able to conclude a satisfactory transaction," the company said in its latest trading update.
It said it was now focusing on trimming costs and cutting the price of its homes to boost sales and improve cashflow.
While it was currently "in full compliance" with its banking covenants, it admitted that unless its banking facilities were changed, it might breach "one or more" covenants next year if the housing market continued to deteriorate.
"In that context, we decided it would be prudent to agree a revised banking facility with our core lending banks conditional on raising further equity," it said.
Speaking to reporters, chief executive Pete Redfern, said the firm was still aiming to raise funds.
"We think that we've got the time and options to complete the capital raising in the near future," Mr Redfern said. "We don't rule out any funding options."
Taylor Wimpey said that in the UK the spring selling season had been "severely impacted" by the lack of mortgage availability and worsening consumer confidence.
Reservations of new UK houses were 45% lower in the 26 weeks to 29 June than they had been the year before, and 29% of orders in the period were cancelled, compared with 19% a year previously.
The total value of its order book was down 33% on a year ago, with average selling prices down 8%.
Taylor Wimpey's US business is also struggling, with sales 13% lower than a year ago and its order book 25% smaller.
There have been reports that rival housebuilder Barratt Developments is also looking to strengthen its finances.
Barratt has debts of about £1.7bn which it built up when bought rival Wilson Bowden last year - when the housing market was at its peak.