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Our sister publication The Financial Times reported on Saturday that L&G was set to increase the amount of money it put aside for bond defaults when it announced its preliminary results next month.

The report said the insurer was currently involved in talks with the FSA about how much money it should set aside and as a result its share price fell. The rumours about L&G being in talks with the regulator forced the insurer's share price to slump 10 per cent to a low of 49.5p on Friday and a further 7 per cent on Monday morning.

However, the insurer's share slide was further fuelled by suggestions from Andrew Hughes, an analyst at JP Morgan, that strengthening reserves could cost L&G as much as £2.4bn. On Tuesday, Legal & General issued a statement declaring it had more than doubled credit default reserves to £1.2bn. Brian Dennehy, managing director of east London-based IFA Dennehy Weller & Co, said Legal & General would not be the only victim of widening bond spreads. Corporate bond spreads widened significantly in the last quarter of last year to levels not seen since the 1930s.

He said: "The key to the current problem is bank bonds. There remains a fear of wider nationalisation of banks with the risk that the interest on the bonds would not be paid."

But Jonathan French, assistant director of media relations for the Association of British Insurers, said he was unaware of any industry-wide issues.

Mr French said: "It is an issue for individual companies. The insurance sector has weathered the financial storms so far."

The FSA warned life insurers last week that they would need to ensure their corporate bond investments took full account of the risk of default prompting some to raise concerns about whether this part of the industry could now also be in serious difficulties.

In its Financial Risk Outlook 2009, the regulator said: "While some insurers have hedging strategies in place that have protected them from falling equity markets, those that are more exposed to falls in asset values run a greater risk of further reductions in excess capital."

It added: "It is critical insurers holding corporate bond portfolios properly review underlying credit developments."