Shares in every major UK bank nosedived yesterday after a leading City firm warned that 2007 could mark the peak for earnings, and doom and gloom rushed through veins of the sector.

Adding insult to injury - and giving the slide extra momentum - the Financial Services Authority yesterday gave its own stark warning about the likelihood of a UK mortgage crisis next year.

Among the big losers yesterday were Royal Bank of Scotland and Lloyds TSB after analysts at Morgan Stanley warned that the credit market crunch will depress earnings across the sector in 2008 and threaten dividends.

Royal Bank shares plunged 5.3%, or 24.5p, to 439.25p, beaten on the slippery slope only by beleaguered Northern Rock, which slumped 5.5%, 6p, to 103p.

Most stocks in the banking sector have shed a third of their value in the past six months, as investors have run for cover after the summer's liquidity crisis.

Morgan's pessimistic research note also highlighted the headwinds of a slowing UK and US economy, a turn in the credit cycle and a pricking in the residential and commercial property bubbles.

It said: "We believe 2007 will mark the cycle peak for bank earnings and, as the bear market effects unfold, fears surrounding profits, dividends and capital are only likely to build."

Unlike previous downturns, Morgan noted that a lack of access to funding meant UK banks will not be able to grow out of their difficult plight.

It drew parallels with the bear market for life assurers between 2000 and 2003, when falling equity markets hampered firms.

Meanwhile, the FSA yesterday warned lenders to prepare for bleak times and secure adequate liquidity, even at high prices.

Clive Briault, retail managing director at the FSA, told the UK's top lenders in a speech at the Council of Mortgage Lenders' annual conference that UK borrowers were likely to come under pressure in 2008, with many unlikely to be able to refinance their home loans at attractive terms - and some unable to do so at all.

According to the FSA, at least 1.4 million short-term fixed-rate mortgages will end in 2008.

Morgan also said that - based on a bearish outlook - a dividend cut would be inevitable at Lloyds, and Royal Bank would be "next on the list" for a possible dividend cut as it "struggles with the integration of ABN Amro and its US exposure".

Speculation has continued that Royal Bank will announce a heavy writedown tomorrow, adding to fears about the effects of the credit crisis on bank balances.

Analysts have estimated that Royal Bank will have to write down between £1bn and £1.9bn as a result of the turmoil in the markets.

Separately, fund manager Nicola Horlick, dubbed "Superwoman" for combining a high-flying City career spanning more than 20 years with being a mother of six, yesterday also warned that the UK could be heading for a housing market crash if thousands of buy-to-let investors ditch their properties as prices tumble Horlick said defaults on buy-to-let mortgages, which make up around a tenth of the market, could be the trigger for a slump as investors cut their losses and let banks repossess their properties.