By Juan Lagorio

The KBW Bank Index of leading commercial banks dropped nearly 20 percent to a 14-year low, tumbling almost 43 percent this month alone.

Confidence in the banking sector was further rattled after State Street Corp said it could need to raise capital and reported a 71 percent drop in fourth-quarter profit on Tuesday, a day after Royal Bank of Scotland Group Plc posted the biggest loss in U.K. corporate history.

The rout was widespread, with shares of regional bank PNC Financial Services Group Inc sliding 41 percent and even relative islands of safety like JPMorgan Chase & Co dropping 21 percent. Investors were worried that the U.S. economy was worsening and that banks may not be able to withstand more credit losses without government help, further diluting shareholder interests.

"The market doesn't trust that banks have properly marked their balance sheets and their loan portfolios. The sense is there are further marks to come, that tangible book is not as it is stated today," said Robert Patten, a bank analyst for Morgan Keegan.

Four analysts increased their 2009 loss estimates for Citigroup Inc due to higher bad loans. Shares of the third-largest U.S. bank closed below $3, a level last reached in November, when the government rescued it with an injection of $20 billion and a backstop on toxic assets.

'ASSUMING THE WORST'

Four days after posting its first quarterly loss in 17 years, Bank of America Corp stock fell to its lowest level since November 1990 as analysts said the largest U.S. bank would remain under pressure until it rebuilds its capital.

Citigroup shares fell 70 cents, or 20 percent, to $2.80, their lowest level in 18 years, while Bank of America stock sank 29 percent, or $2.08, to $5.10.

"From the loan portfolio to the balance sheet condition, you have just bad news for the banks," said Keith Wirtz, president and chief investment officer of Fifth Third Asset Management.

"People are just assuming the worst," said Walter Todd, a portfolio manager at Greenwood Capital Associates.

The U.S. Treasury Department has asked big banks receiving government bailout funds to provide more details about lending, a sign of further pressure to increase credit -- and hopefully boost the economy -- as they struggle with mounting losses.

On Monday, RBS said it was on course to report a 2008 loss of up to 28 billion pounds ($41 billion) after taking big losses from bad debts, while Britain threw its troubled banks another multibillion-pound lifeline, the second since October.

RBS shares fell 11 percent on Tuesday after sinking 67 percent Monday, while Lloyds Banking Group Plc stock lost almost one-third of its value, hitting its lowest price in 20 years. Barclays Plc lost 17 percent, despite the fresh government actions to pump money into the markets.

'INVESTOR FATIGUE'

"We thought 2008 was bad. I think 2009 is going to be a continuation of that whole song," Wirtz of Fifth Third said.

"People are seeing a very fragile banking system, which is not going to be helpful to getting our economy back on track," said Robert Lutts, president and chief investment officer of Cabot Money Management.

Regions Financial Corp, a large U.S. Southeast bank, reported an unexpected $6 billion charge to write down parts of its banking business on Tuesday, bringing its fourth-quarter loss to $6.22 billion. Shares slid 24 percent.

State Street stock sank 59 percent to its lowest level in over a decade after the world's biggest money manager for institutions reported higher unrealized losses in its commercial paper program and investment portfolio and said it could need to raise capital.

Bank of New York Mellon Corp, a major custody bank, moved up its earnings report following the disappointing results from rival State Street. Bank of New York's fourth-quarter profit tumbled 88 percent and its shares fell 3 percent after hours, following a 17 percent drop in regular trading.

Among regional banks, PNC stock slid 41 percent on worries that the seventh-largest U.S. bank by assets might suffer investment losses or need more capital to absorb bad loans at newly acquired National City Corp.

The financial stocks' freefall also dragged down J.P. Morgan, whose shares dropped 21 percent to the lowest price in six years after analysts cut their earnings outlook on the second-largest U.S. bank.

Wells Fargo & Co's shares tumbled 21 percent to their lowest level in 10 years amid growing fears of lower earnings, dividend cuts and higher credit losses.

"Nothing can cure what took us four years getting into this mess other than time, over the next several quarters ... Nobody wants to venture and pick a bottom. There is just too much investor fatigue out there," Morgan Keegan's Patten said.

(Additional reporting by Elinor Comlay and Joseph A. Giannone in New York and Doris Frankel in Chicago, editing by John Wallace, Gerald E. McCormick, Matthew Lewis and Jeffrey Benkoe)