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 UK taxpayer after a bailout during the credit crisis -- at one stage plunged 21 percent before recovering to close down 7 percent.

RBS fell to its lowest point 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.

It also underperformed a 2.7 percent drop in Britain's benchmark FTSE 100 index <.FTSE> which fell for the sixth straight day on fears over the global economy.

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 Friday.

His bank fell 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.


RBS shares are well below the 49.9 pence level at which the British taxpayer effectively bought its stake and implies that Britain is currently sitting on a loss of some 20 billion pounds on its RBS investment.

The big problem at the moment for investors is the wholesale funding market, and banks such as RBS could have problems, said Royal London Asset Management fund manager Jane Coffey.

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.

The result followed a grim set of numbers from larger rival Lloyds 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.

Lloyds' shares tumbled 10 percent after that loss, making any profitable sale of the government's 41 percent stake -- also acquired after a credit crisis bailout -- an even more distant prospect.

The taxpayer-backed RBS and Lloyds fared far worse than British rivals HSBC and Barclays , which got through the crisis relatively unscathed and posted respective profits this week of $11.5 billion and 2.6 billion pounds.

RBS 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.

Hester warned RBS could cut some 2,000 jobs at the GBM division over the coming year.

RBS has axed 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.

RBS was rescued in October 2008 after its finances were stretched by the credit crisis and its part in the acquisition of Dutch bank ABN AMRO in 2007, which also left it with a large exposure to Greece.

RBS was propped up with a total of some 45 billion pounds of taxpayers' money, causing the eventual resignation of then chief executive Sir Fred Goodwin, who had presided over the company's aggressive acquisition policy. ($1 = 0.613 British Pounds)

(Writing by Paul Hoskins; editing by Sophie Walker)