LONDON (Reuters) - A backlash against Lloyds Banking Group's takeover of HBOS built on Monday as its profit warning stoked fears it may need more state funds or be fully nationalized, sending its shares down over 20 percent at one stage.

Lloyds shares stabilized after the initial sell-off, however, encouraged by government comments that it does not want to take a bigger stake, and by 1450 GMT (9:50 a.m. EST) Lloyds shares were flat at 61.4 pence. They had fallen as low as 48p to extend their one-third tumble after Friday's profit warning.

Lloyds said then that HBOS, which it only bought last month, would make a pretax loss of 10 billion pounds, higher than expected due to a jump in losses on corporate loans at the tail end of last year.

It raised concern that problems at HBOS had infected Lloyds, which had avoided most credit crisis pitfalls, and put pressure on the enlarged bank's capital position, especially with more hefty losses expected this year.

Losses from the HBOS book are not surprising and we expect them to push the combined group into a loss for 2009, analysts at UBS said in a note. If losses were to accelerate, there is a risk capital could reduce to levels below which the market would have confidence in the group.

The government owns 43 percent of the bank and may need to inject more funds and take a majority, or be considering a full nationalization, dealers and analysts said.

Tom Rayner, analyst at Citi, estimated Lloyds will make a cumulative 2008-2010 loss of 14 billion pounds and may need to raise 11.2 billion pounds of equity to keep capital topped up.

Stephen Timms, Treasury minister, told BBC radio the government was not contemplating injecting more capital into the bank at present, but would do what it takes to maintain market stability.

British finance minister Alistair Darling said on Saturday that banks were best left in the private sector, attempting to cool speculation that Lloyds may be nationalized.


We believe that the UK Government would only nationalize Lloyds as a very last resort -- we are not that close to a last ditch scenario just yet, though very much aware of the strong economic head winds, said a spokeswoman for private client investment manager Brewin Dolphin, a Lloyds investor.

One option could be for the government to convert 4 billion pounds of preference shares into equity, which would cut about 480 million pounds in annual interest but lift the government's stake to over 50 percent.

Investors were angered that the government-brokered takeover of HBOS may have been rushed, and that as recently as Wednesday Lloyds Chief Executive Eric Daniels gave no indication of the scale of problems at HBOS.

He told lawmakers last week that his bank would have typically put in 3 to 5 times more due diligence on the takeover if it had not been so hurried.

They turned an investment in a steady company with a sound balance sheet and high dividend yield into a risky proposition with no dividends at all, said Roger Lawson, communications director of the UK Shareholders Association, a retail investor lobby group. For an investor in Lloyds TSB this is a nightmare.

Lawson said Lloyds Chairman Victor Blank should step down for leading the charge on the takeover.

HBOS's corporate arm, which was praised for backing companies including Philip Green's retailer Arcadia, took big bets on property and private-equity style investments that have now soured. The corporate loan book was 117 billion pounds at the end of June.

Shares in Royal Bank of Scotland were down 3 percent as, like HBOS, the lender is exposed to the problem commercial real estate sector.

(Additional reporting by Dominic Lau and Adrian Croft; Editing by Simon Jessop)