Standard Chartered has seen £6 billion wiped from its value amid fears it could lose its US banking licence after regulators branded the lender a "rogue institution" over its dealings with the Iranian government.
The 160-year-old bank saw shares plunge 16% after regulators claimed it exposed the US to terrorists and drug kingpins by hiding £160 billion of transactions with Tehran.
The allegations will come as a shock given Standard's reputation as a safe and sound bank, which described its approach as "boring" amid the turmoil engulfing the sector.
But the bank, which employs 2,100 staff in the UK, said it "strongly rejects" the portrayal by the New York State Department of Financial Services (DFS).
Standard, which will face the wrath of US regulators at a hearing on August 15, said the claims are inaccurate and that 99.9% of its dealings with Iran complied with regulation.
Meanwhile, MP John Mann, a member of the Treasury select committee, accused US regulators and politicians of being anti-British in an attempt to shift financial markets from London to New York.
Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, said: "There is some irony that, a few days after describing its approach as boring at its interim results, Standard Chartered should become embroiled in yet another potential banking scandal."
Standard, which employs nearly 90,000 people worldwide and sponsors Liverpool Football Club, has been threatened with losing its licence to operate within New York state.
In an explosive legal order, DFS superintendent Benjamin Lawsky said: "In short, SCB (Standard Chartered Bank) operated as a rogue institution."
The investigation's findings come after fellow British bank HSBC was accused of allowing drug cartels and rogue states to launder billions of pounds through its US arm. Barclays' reputation is in tatters over the Libor-rigging scandal and the payment protection insurance mis-selling scandal hit most major lenders.