Shares in Royal Bank of Scotland plummeted nearly 9% yesterday - weighed down by Zurich Financial's decision to pull out of the multi-billion-pound auction of Direct Line and Churchill.

Shares in Royal Bank of Scotland plummeted nearly 9% yesterday - weighed down by Zurich Financial's decision to pull out of the multi-billion-pound auction of the Edinburgh institution's Direct Line and Churchill insurance operations and hit by global banking sector weakness.

Banking stocks around the globe were affected by troubles at giant US lenders Freddie Mac and Fannie Mae. Shares in Royal, which has a significant business in the US in Citizens Financial, finished 17.25p, or 8.6%, lower at 182.75p. This is only about one-third of their 52-week high of around 550p.

Although shares in most other UK banks fell yesterday, some sharply, Royal was in percentage terms the biggest loser by a significant margin.

Its much greater loss, relative to its peers, followed Zurich's announcement on Thursday night that it had pulled out of the bidding for Royal's insurance operations. Swiss-listed insurer Zurich was viewed widely as the favourite to acquire these operations.

Sources are putting the likely number of bidders still in the frame at two or three, with Allianz of Germany, and US insurers Allstate and Travelers among the names touted, but there is no obvious frontrunner.

Royal's planned sale of its insurance business is the centrepiece of its efforts to boost capital by £4bn through asset sales, to augment the £12bn it raised recently in Europe's biggest-ever rights issue of shares to rebuild a balance sheet hit by the fall-out from the US sub-prime mortgage crisis.

Experts had predicted that RBS Insurance might fetch more than £7bn. However, there are increasing doubts about such a take-out price given the departure of Zurich and several other potential bidders, as well as the general deterioration in economic conditions and the continuing grip of the credit crunch.

Analysts are now talking about Royal struggling to raise £6bn from a sale of its insurance operations and some are suggesting, given that the Scottish bank's chief executive Sir Fred Goodwin talked Continued on Page 25 Continued from Page 26 about selling only at a "very high price", that the auction could be abandoned and the operations retained.

Meanwhile, Royal yesterday confirmed it is in talks to sell ABN Amro's Australian and New Zealand operations.

National Australia Bank (NAB) is one of a number of parties in discussions to buy the ABN assets, acquired by Royal amid the Dutch bank's near £50bn takeover last year.

NAB did not reveal a potential price for ABN Amro Australia Holdings in its statement to the Australian Securities Exchange.

The bank said it was "participating in a process being conducted by the Royal," but sounded a cautionary note. "There can be no certainty that a transaction will result," NAB said.

Any transaction would be subject to due diligence and relevant regulatory approvals, it said.

Buying ABN Amro's Australian and New Zealand operations would give NAB, Australia's second-largest bank by market capitalisation, an equities dealing arm for the first time since the early 1990s.

Analysts have speculated the ABN Amro business could be worth up to A$1.3bn (£600m).

"In general, we view the disposal of profitable operating businesses in order to address the capital strains from an overpriced acquisition as a recipe for value destruction," one analyst said.

l Private equity firm CVC Capital Partners is in the "leading position" to buy high-end insurer Lombard, a unit of the UK's Friends Provident, sources close to the matter said yesterday.

US private equity firm Hellman & Friedman has also been named as a suitor for Lombard, but Swiss Life, formerly seen as a potential frontrunner and the only trade buyer, said last week it was no longer considering making a bid.