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UK banks fear Greek tragedy in Republic

Fears that Ireland is heading for a Greek-style bailout are mounting across the UK banking sector.

Part-nationalised RBS was the worst impacted, down 4% at one stage, as investors fretted over its vulnerability to an Irish crisis through the group's Ulster Bank subsidiary.

The wider FTSE 100 Index also slipped into the red amid speculation of a worsening financial crisis in Ireland that could see the country resort to rescue cash to avoid bankruptcy.

Ireland's cost of borrowing has reached its highest level since the launch of the European single currency. The yield on a 10-year bond reached almost 9% yesterday. In currency trading, the euro was likewise under pressure, down against the US dollar and the pound.

RBS was not the only bank seeing falls, with Barclays down 2% and HSBC off more than 1% in a poor session for blue chip financial stocks. The International Monetary Fund warned over bank exposure to debt-laden eurozone countries earlier this week, which it said could have a knock-on impact on the UK economic recovery.

Joshua Raymond, market strategist at City Index, said experts were anxious over a potential "domino effect" across the banking sector if Ireland's woes impact RBS. "Some market analysts have estimated the UK bank has exposures roughly totalling £42.2bn worth of Irish debt and so any escalation of its current problems could create a domino effect amongst those banks that have a direct or indirect association with its debt," he said.

Ireland's bank bailout was the world's costliest, per capita.