Royal Bank of Scotland Group, which is majority-owned by taxpayers, has reported a pre-tax loss of £2.2bn for the July to September period.
It compares with a profit of £1.9bn in the same period last year.
RBS has written off another £3.3bn in bad debts and other bad investments, which is down from the £4.7bn it wrote off in the previous three months.
The bank said although conditions had improved in the past three months they "remain fragile".
RBS Chief Executive Stephen Hester: "It will be a marathon and not a sprint"
It predicted that the number of companies failing, and the number of people out of work, would not peak until next year.
RBS chief executive Stephen Hester told the BBC that the bank's recovery "would be a marathon not a sprint" and that he expected losses until well into next year.
Shares in RBS closed up 5.3%.
On the subject of bonuses, Mr Hester said everyone at the bank was treading a "very delicate tightrope".
Hugh Pym, BBC chief economics correspondent
The picture on business lending is patchy. RBS says it has increased lending to small businesses during the third quarter of this year compared with the previous quarter.
But if you look at total business lending over the full year to date it has actually fallen a bit. This might add weight to the criticism that tax payer owned banks are still not doing enough to help businesses raise funding to take them out of the recession.
But, RBS says there is a trend for companies and households in the UK and the US to opt for debt repayment rather than new borrowing. It says it has £27bn of credit lines on offer to companies which have not been taken up.
The debate over whether people and companies don't want to borrow or whether banks don't want to lend is still unresolved.
He said the bank was leading the way on pay within the government constraints, but he added it was necessary that RBS kept the best people in order to return the bank to profitability.
RBS said it had increased lending to small businesses in the past three months and also extended £27bn of credit lines to small and medium businesses, which had not been taken up.
It added its core banking activities had made an operating profit of £1.2bn.
Tower Group's banking analyst, Ralph Silva, says that RBS's loan book seems to be suffering more than its competitors.
"While they are still showing solid numbers for retail banking, they are struggling with their investment and corporate banking operations," he said.
"It appears that businesses that have to buy banking products are not happy with the uncertainty around the banks future. "
Earlier in the week, it was announced that RBS is to be forced by the European Commission to sell parts of its business
It will sell RBS branches - originally under the Williams & Glyn's brand - in England and Wales, as well as the NatWest brand in Scotland, RBS Insurance, and its card payment business, Global Merchant Services.
It also plans to put £282bn of its assets into the government's insurance scheme for toxic assets, which will take the government's stake in RBS to 84%. It is already 70% owned by the taxpayer.
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