More than £6bn was slashed from Royal Bank of Scotland's stock market worth yesterday as its shares plummeted more than 20%, and the Edinburgh institution's troubles were compounded when its credit rating was cut by international agency Standard & Poor's.

Royal Bank was the biggest percentage faller in the UK banking sector yesterday with a drop of about 20.5%, fuelling chatter that it could become a takeover target for HSBC, as growing fears about the stability of the world financial system hammered global stock markets and routed banking stocks.

The downgrade by S&P, which also said the outlook on Royal's ratings was negative, flashed up on traders' screens minutes before the 4.30pm close in London yesterday.

S&P cut its long-term counter-party credit rating for Royal Bank of Scotland Group from AA- to A+.

The ratings agency said capitalisation remained a "relative weakness" for Royal in spite of the bank's £12bn rights issue during the summer.

More comfortingly for Royal, S&P said the group's "liquidity and funding profile does not present any particular vulnerabilities in our view".

HBOS, which rushed last month to secure a takeover by Lloyds TSB as the wholesale funding markets on which the Bank of Scotland and Halifax parent is reliant seized up in the wake of US investment bank Lehman Brothers' collapse, was the second-biggest faller in the UK banking sector yesterday with a drop of 19.8% to 160.8p.

This widened out the discount at which its shares are trading to Lloyds TSB's offer to more than 25%, amid persistent speculation the London-based bank might yet renegotiate the terms of the deal.

Royal's shares shed 38.1p to 148.1p - cutting its stock market capitalisation by about £6.3bn to £24.5bn.

Referring to the ratings moves on Royal, S&P credit analyst Nigel Greenwood said: "The rating actions reflect Standard & Poor's' expectation that RBSG's (Royal Bank of Scotland Group's) financial profile may continue to weaken."

S&P declared: "A combination of mixed earnings prospects, deteriorating credit risk in its key geographies, and difficult market conditions in which to complete its capital transformation plan leave RBSG less well-positioned than some of its major global peers. Standard & Poor's considers that RBSG's financial flexibility is currently low for, despite opportunities to delever and dispose of non-core assets, the prevailing environment is not conducive to such actions."

It added: "While funding conditions for banks in general are currently highly stressed, RBSG's liquidity and funding profile does not present any particular vulnerabilities in our view." S&P noted Royal's "underlying earnings were generally sound, being only 3% down on a year-on-year pro-forma basis" in the first half.

However, it added: "Capitalisation remains a relative ratings weakness in our view. This is despite the benefits of a huge £12bn rights issue, completed in June, and a strengthened capital policy.

"Currently, gains on business disposals lag the targeted £4bn and market conditions will challenge the management's ability to progress the transformation of capitalisation to the levels anticipated."

Royal's efforts in recent months to sell its insurance division, including Direct Line, have been hampered by the withdrawal of several heavyweight potential suitors.

S&P yesterday noted the "possibility of further credit market related write-downs" at Royal.

However, it said: "With a customer loans to customer deposits ratio of 136% at June 30, 2008, RBSG's liquidity and funding profile compares well with most UK banks, being underpinned in part by its dominant corporate franchise.

"We also consider that RBSG continues to make sound progress with its integration of the global wholesale and international retail businesses that it acquired as the lead bank in the consortium that purchased (Dutch bank) ABN Amro."