LONDON (AP) — The British pound slumped to a seven and a half year low against the dollar yesterday amid fears that Britain's credit rating could be downgraded if the government has to take over ailing banks.

By mid-afternoon London time, the pound was 3.4 percent lower at $1.3965, having earlier fallen to $1.3936, its lowest since July 2001. As recently as July 2008, the pound was trading as high as $2 before concerns about the banking system and the wider economy as a whole prompted a sharp reverse.

The selling of the pound gathered pace in the wake of Monday's announcement from the British government that it was bailing out the banking sector for the second time just over three months.

"Investors are concerned about the cost of the government measures and the implications they might have, with escalating borrowing and the possible doubling of Britain's debt ratio," said Neil Mackinnon, chief economist at ECU Group.

"There is mounting market talk that Britain's credit rating will be downgraded," he added.

On Monday, the British government unveiled a raft of measures, including an insurance programme to cover bank losses on troubled assets, in order to shore up confidence in the banks and prompt them to start lending again. British banks, like those worldwide, have taken huge losses on securities backed by US sub-prime mortgages, and are now suffering from the wider business and financial-market downturn triggered by the sub-prime crisis.

Any hopes that the announcement would ease stock-market pressures on the banks evaporated as they suffered another day of frenzied selling on Monday.

Fears focused on the Royal Bank of Scotland, which saw nearly two-thirds of its market value wiped out following its disclosure that it will likely report a full-year loss of £28 billion ($41.3 billion), which would be the biggest loss ever reported by a British company.

Though some of the banking stocks have recouped some of Monday's losses, sentiment in the sector remains fragile indeed, with growing talk that one, if not more, will end up totally owned by the government. Among the raft of measures unveiled, the British government said it will be increasing its stake in RBS to 70 percent from 58 percent by converting preference shares into ordinary shares.

If the British government took control of one or more banks then it will take responsibility for their liabilities, which could, according to ECU Group's Mackinnon, raise the country's debt burden to levels seen in Greece and Spain, which have had their credit ratings downgraded in the last week.