Shares in Alliance & Leicester fell 10% to their lowest close in almost eight years yesterday after the lender announced write-downs related to the credit crunch of some £391m.

It also conceded that its mortgage business could shrink by 10% this year as the bank, which relies on the troubled wholesale money markets for almost half its funding, cuts back on loans.

Alliance & Leicester shares dropped 51.75p to 458.75p in the course of the day, dragging other banks down.

The downbeat atmosphere was heightened by a bearish note from analysts at Credit Suisse predicting a huge hit for lenders if house prices continue to fall.

French bank Credit Agricole also announced yesterday it is to seek fresh capital from investors as it joined domestic rival Societe Generale and Belgian-Dutch Group Fortis is announcing write-downs stemming from the US housing market crisis and subsequent credit crunch.

Alliance & Leicester's contribution to the day of write-downs was to reveal a £139m impairment on treasury investments in assets hit by the fall-out from the US mortgage crisis, as well as a £53m write-down. The remaining £199m will impact on reserves not profits.

It had previously announced £185m of write-downs in February.

The bank also warned at the time that a rise in the cost of funding could hit 2008 profit. It said yesterday that it faced funding costs of £49m in the first four months of the year. This is expected to rise to £150m over the full year.

The bank insisted it had no need for a capital raising. Britain's seventh-largest bank has a core tier one ratio of 6.4%.

Royal Bank of Scotland, down 2% yesterday as investors sold out of banks, and HBOS, which shed 4%, have both announced rights issues to bring them up to similar capital levels.

Alliance & Leicester also revealed yesterday that its mortgage balance fell £1.5bn in the first four months of year to £41.2bn, a drop of some 3.5%. The bank indicated to analysts that a 10% fall over the year would be a "fair estimate", equating to £4bn of business.

A number of analysts are also predicting the company could be forced to slash its dividend.

Meanwhile, investment bank Credit Suisse said yesterday that house prices in the UK are set to fall further, putting additional pressure on banks which would have to put more money aside to cover losses on mortgages.

It said that Bradford & Bingley, down 8.2% yesterday, was particularly vulnerable to falling house prices and rising loan impairments.

Among the other banks Barclays and Lloyds TSB fell 1.6%, while HSBC was up 1.5%.