Bank Collapse Catastrophe Warning

The possible collapse of one of world's biggest investment banks could be "catastrophic" and lead to the "implosion" of the banking sector, Sky sources say.

British bank Barclays had appeared to be the frontrunner to take over the struggling Lehman Brothers but has pulled out of the bidding, a source close to the deal said.

And a consortium led by the Bank of America is reported to have also dropped out.

US government officials and top Wall Street bankers are desperately trying to sell Lehman to avert a collapse that could severely disrupt global markets.

The rescue effort is working to a deadline of midnight for a deal to be struck.

Lehman has suffered badly in the wake of last summer's credit crunch and the collapse of America's sub-prime mortgage market.

Last week the bank revealed massive losses of around £2.2bn ($3.9bn) in the last quarter and announced it was cutting 1,500 jobs.

US Treasury Secretary Henry Paulson remains strongly opposed to using government money in any deal aimed at resolving the crisis, a source said.

But Sky business presenter Emma Crosby said it would be unprecedented if the bank was allowed to go bust.

"A bank of this size, up until now, has not been allowed to fail - it was only last Sunday that mortgage banks Fannie Mae and Freddie Mac were taken under government control.

"Sky sources have warned of the potential catastrophe and implosion of the banking sector if Lehman collapses. And they say another major bank could go bust along with 15 smaller mortgage lenders."

Meanwhile the former head of the US Federal Reserve, Alan Greenspan, has predicted the failure of more major financial institutions.

He said the financial crisis was the worst he had seen in his career and the chances of escaping a recession were "less than 50%".

"I can't believe we could have a once-in-a-century type of financial crisis without a significant impact on the real economy globally, and I think that indeed is what is in the process of occurring," he said.

"And indeed, it will continue to be a corrosive force until the price of homes in the United States stabilises."