Shares in Fannie Mae and Freddie Mac, America's biggest mortgage groups, slumped to their lowest levels for two decades as traders speculated that Washington will be forced to bail out both of them.

Fannie Mae shares sank 19 per cent in lunchtime trading in New York to $4.87, having already lost 87 per cent of their value this year. Freddie Mac stock tumbled 22 per cent to $3.24, on top of the 90 per cent decline already this year.

While Henry Paulson, the US Treasury Secretary, last month said that Washington was prepared to prop up both companies by offering them unlimited government loans and by buying stock in the two groups over the next 18 months, Wall Street is scared that should the Bush Administration bail them out, the share price of both firms would sink to zero.

Wall Street has become concerned over the last few days after a US report claimed that Washington privately believes both companies will fail to raise new capital.

In that event, the government would probably acquire preferred stock in Fannie and Freddie, in a move which would wipe out existing shareholders.

Daniel Mudd, the chief executive of Fannie Mae, sought to calm investors in a US radio interview earlier today. He said: "They [Washington] haven't offered anything and we haven't asked for anything. I don't anticipate that they will do that."

The two government-sponsored companies, the largest source of funding for home mortgages in the US, have struggled with soaring losses from mortgage defaults. Fannie Mae and Freddie Mac have lost a combined $3.1 billion between April and June, and investors fear the losses will continue to grow.

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