The taxpayers' paper loss on Halifax Bank of Scotland and Lloyds TSB widened to almost £3 billion today as the banks' shares continued to sink.

The Treasury is acting as a back stop on share offerings totalling £13 billion by the two merging banks, which could leave it with a 43.5% stake in the combined business.

HBOS plans to raise £8.5 billion through offering 7.5 billion new shares at 113.6p - but its stock was trading at 80p today, making the new shares worth just £6 billion.

Because the Government will buy up the new stock unwanted by existing shareholders it is sitting on a paper loss of around £2.5 billion, as investors are extremely unlikely to take up the shares.

Under the same principle, the Treasury is losing almost £400 million on Lloyds TSB. Lloyds said it was placing 2.6 billion shares at 173.3p but it was trading at around 150p today.

Lloyds TSB yesterday lowered its takeover price for HBOS in the wake of the turmoil since the deal was originally announced.

The all-share takeover now values ailing HBOS at less than £5 billion, compared with more than £12 billion four weeks ago.

Shareholders in HBOS - which is the UK's biggest mortgage lender - are likely to be left with just a 20% stake in the combined bank when the deal is completed early next year.

Shore Capital analyst Danny Clarke said shares in the two banks had fallen despite the Government assistance as investors weighed up the poor short-term prospects for the combined business.

Mr Clarke said: "The scale of the dilution and the shareholding by the Government surprised people yesterday."

Under the terms of the bail-out, the new bank is not allowed to pay any cash dividends to its "ordinary" shareholders until a further £4 billion in preference shares placed with the Government has been paid back.

Mr Clarke said dividend payments may not be resumed until 2010 at the earliest. "The combined entity does not look like an attractive short term play," he added.