SHARES IN CIT, the embattled US small-business lender, plunged more than 70 per cent yesterday after the failure of government bail-out talks prompted growing fears of a bankruptcy filing.

If the group were to file for Chapter 11 protection, it would be the fourth-largest bankruptcy by assets in the United States.

The regulator’s decision not to save the lender has drawn a new line in the sand for financial institutions hoping for government assistance. It also underscores the vulnerability of companies such as CIT that depend on wholesale capital markets rather than deposits to fund operations.

CIT, which has had a presence in Ireland since 1999, had been expanding its operaitons here until recently. In late 2007, it announced plans to expand its workforce in Dublin to 600 from 450 over a five-year period.

CIT became a bank holding company in December but that did not give it enough time to make the transition to a more stable funding model.

“If you rely on the wholesale capital markets, when the cost of those funds has risen, you are susceptible to liquidity runs and fear and risk aversion,” said Dino Kos of Portales Partners and a former New York Federal Reserve official.

These concerns were at the heart of government reluctance to help CIT, in spite of its role as a lender to thousands of small US businesses. Until Wednesday, CIT was locked in talks with regulators to win approvals to issue government-backed debt and move assets into its banking subsidiary.

CIT told investors late on Wednesday that there was no “appreciable likelihood of additional government support being provided over the near term”. The company’s management is consulting with advisors about alternatives.

Jeff Peek, CIT’s chief executive, was shocked that government assistance was taken off the table, according to someone close to the company. CIT’s stock had fallen 71 per cent in midday trading yesterday, while its bonds traded as low as 50 cents on the dollar .