Shares in Lehman Brothers fell as much as 40 per cent yesterday amid growing worries that the investment bank would be unable to raise fresh capital to bolster its balance sheet before it reports third quarter earnings.

The plunge in Lehman shares underlined investors' on-going fears over the health of the global financial system and helped revers the market rally on Monday that followed the US government's takeover of mortgage financiers Fannie Mae and Freddie Mac.

The S&P 500, which rose 2.1 per cent on Monday, was down 1.5 per cent in at midday in New York. Lehman shares fell to $8.50 – their lowest level since October 1998 – before recovering slightly. They were down $5.25, or 37 per cent, to $8.87 at midday. At that price, the bank is valued at $6.2bn – a fraction of its book value.