Royal Bank of Scotland slid to a pretax loss of 678 million pounds ($1.1 billion) in the second quarter, bruised by writedowns on Greek government bonds and Irish customers struggling to repay loans.

Shares in the bank -- 83 percent owned by the British taxpayer after a credit crisis bailout -- plunged 21 percent in early trade, the FTSE 100's worst performer as the index itself was hammered by fears about U.S. and euro zone growth.

At that point RBS stock was at its lowest in more than 2 years, a long way shy of levels at which the government, keen to find new sources of income, could sell its stake at a profit.

The banks are not going to make a profit in this sort of environment and their provisions are going to get worse. RBS has got a lot of problems, said Brown Shipley fund manager John Smith.

The possibility that we are heading into another credit crunch is very high, added Smith, whose firm has a small number of RBS shares.

RBS Chief Executive Stephen Hester said his own investment bankers had retreated to much more defensive positions in recent months: These are markets to be careful, not to try and be a hero, he told reporters on Friday.

His bank slid into the red after posting a 1.17 billion pound profit a year ago, hit by impairments on bad loans of almost 2.3 billion pounds. That was up from 2 billion in the first quarter but a little better than 2.5 billion a year earlier.

The bank wrote off 733 million pounds to cover anticipated losses on its 1.45 billion pound Greek bond portfolio.

It also said the impairment charge at its Ulster Bank operations in Ireland, where consumers are grappling with a housing market collapse, was 1.25 billion pounds, just 49 million pounds better than in the first quarter.


Earnings at RBS were also undermined by an 850 million pound provision to cover the costs of compensating customers who had been mis-sold payment protection insurance.

Overall that left RBS with an 897 million pound net loss, worse than the 424 million pounds forecast by analysts at WestLB but broadly in line with the 800 million predicted by brokerage Keefe, Bruyette & Woods.

The result followed a grim set of numbers from larger rival Lloyds on Thursday when it reported a first half pretax loss of 3.25 billion pounds on the back of mis-selling charges and losses in Ireland.

Shares in Lloyds slid on the news, making any profitable sale of the government's 41 percent stake -- also acquired after a credit crisis bailout -- an even more distant prospect.

RBS stock was down 9.2 percent at 27.7 pence by 0749 GMT having fallen as low as 24 pence earlier in the session. That left it a long way short of the 49.9 pence level at which the British taxpayer effectively bought its stake.

Group income in the second quarter fell 5 percent versus a year earlier to just under 7.8 billion pounds as the bank pointed to a drop in revenue at its GBM investment banking operations, citing heightened risk aversion among clients.

The bank incurred lower staff costs in GBM, however, helping second quarter costs fall 6 percent from the previous quarter.

We are forced to stay efficient and that will mean ongoing tight attention to costs, Hester said during a conference call.

If the external environment changes, and it looks like it is changing in terms of slower economic growth and regulatory practice, we will need to respond again, and the investment banking area is one such area where it looks as if we will need to respond again on costs.

RBS has cut 27,500 jobs, including thousands of investment bankers, and has scaled back its GBM business, reducing its client base to 5,000 from 26,000 and exiting 12 countries. ($1 = 0.613 British Pounds)

(Writing by Paul Hoskins; editing by Sophie Walker)