Credit woes returned to haunt Wall Street yesterday after shares in Fannie Mae and Freddie Mac, which have both lost more than 80% of their value this year, tumbled on fears of a government bailout of the two housing finance companies that would wipe out shareholders' value, while analysts warned US banks may incur more write-downs.

Credit woes returned to haunt Wall Street yesterday after shares in Fannie Mae and Freddie Mac, which have both lost more than 80% of their value this year, tumbled on fears of a government bailout of the two housing finance companies that would wipe out shareholders' value, while analysts warned US banks may incur more write-downs.

Financial sector troubles initially pushed the Dow Jones Industrial Average down sharply from the opening bell.

Fannie and Freddie are viewed by many as pillars of the US housing market and their recent troubles have knocked the value of banking shares in Britain, mainland Europe and Asia.

Shares in Fannie and Freddie were also hit by a negative research note from Dick Bove, an analyst at broker Ladenburg Thalmann. He said the government should recruit financial industry leaders to oversee dismantling of the two companies.

"The only rational action" to be taken relative to Fannie and Freddie "is to get rid of them," Bove wrote.

Many Wall Street analysts say Treasury Secretary Henry Paulson is not interested in protecting shareholders, only in Fannie and Freddie's ability to support the battered mortgage market.

That means a government rescue might not occur until there is evidence the mortgage companies are unable to sell short-term debt - an indication that they would no longer be able to operate normally.

Freddie in particular has investors and analysts fearful. The firm earlier this year promised to raise $5.5bn (£2.9bn) to shore up its finances but has not yet done so and its sinking share price makes raising that money far less feasible.

Fannie Mae's chief executive has sought to reassure investors that no bail-out is imminent and that the company's financial position remains solid.

The Bush administration last month announced a plan to provide unlimited government loans to the two mortgage giants and to purchase stock in the two companies if needed for a period covering the next 18 months.

The two government- sponsored companies are the largest source of funds for US home mortgages. But they have struggled with soaring losses from mortgage defaults. Washington-based Fannie and Freddie have lost a combined $3.1bn between April and June, and investors fear the losses will continue to grow.

The crisis at Freddie and Fannie was not the only problem facing the US financial sector yesterday. Wall Street research analysts are projecting yet another tough quarter for US investment banks marked by additional write-downs across a series of fixed-income assets amid an already weak operating environment.

Citigroup analyst Prashant Bhatia widened his third-quarter loss estimate for Lehman Brothers Holdings. Bhatia and Lehman Brothers analyst Roger Freeman also cut their third-quarter earnings estimates for Goldman Sachs Group and Morgan Stanley.

"We are lowering our third-quarter estimates to reflect the difficult operating environment, characterised by lower client-related trading volumes and losses on hard-to-sell assets," Bhatia said.

Bhatia expects Lehman to take fresh asset-related writedowns of $2.9bn. He expects $1.8bn in write-downs at Goldman and $1.7bn at Morgan Stanley.

"Based on further deterioration in several indices, we expect further write-downs, primarily related to mortgage assets," Bhatia wrote in an August 20 note to clients.

Lehman analyst Roger Freeman said write-downs for this quarter would come from exposures to prime residential mortgages, sub-prime mortgages and securities, collateralised debt obligations and leveraged loans