The recent turmoil in the credit market has almost completely wiped out Alliance & Leicester profits for the first six months of the year.

The bank, which has agreed a £1.26 billion sale to Abbey's Spanish banking parent Santander, reported interim pre-tax profits of £2 million, down from £290 million.

Losses on investments hit by the credit crisis and soaring funding costs in crippled wholesale money markets combined to punish the company's margin, A&L said.

The Santander takeover provided A&L with greater stability and certainty at a time of "significant external risks", according to the firm.

The bank said it took a £398 million knock from the credit squeeze in the first half.

But this was up just marginally on the figure reported in May and only £209 million of the hit affected the A&L's bottom line.

Underlying core operating profits - with credit crunch writedowns and funding costs stripped out - rose 2% to £301 million, said A&L.

The group's mortgage business has slowed dramatically as it seeks to tighten lending criteria in the face of market troubles.

Its share of gross lending - all new business and advances - has more than halved to 1.6% from 3.4% in the first half of last year.

But net lending, which includes customers who are taking their home loans to other lenders, fell from a 4.2% market share into negative territory as the bank lost more borrowers than it gained.

A&L's half-year bad debt charges rose to £62 million from £56 million in the same period last year.

Arrears levels for borrowers three months or more behind with repayments rose from 0.49% of its mortgage book at the end of December to 0.61%, while the number of homes repossessed rose from 89 this time last year to 120.

David Bennett, group chief executive, said A&L was taking prudent action and proving resilient to the market woes, but warned the problems in the sector may not ease for some time.

"There is a risk that the current economic and market turbulence could continue for a significant period of time and a risk of further uncertainty and contagion impacting the valuation of Alliance & Leicester," he said.

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