Barratt Developments, Britain’s second-largest housebuilder, was forced to reassure the City about its financial position yesterday after a collapse in its share price.

Mark Clare, the chief executive, confirmed that Barratt was trading within its banking covenants, but he admitted that talks with its four main lenders were taking place as the company grapples with net debt of £1.7 billion while its market value hovers at about £250 million.

Indeed, Barratt’s market value plunged as low as £186 million in late afternoon trading as panic selling set in, sending the shares down 38p to 53½ amid fears that the company was working on an emergency funding package just as it calculates what provisions it will be forced to make on its land holdings in time for a financial year ending on June 30.

Mr Clare, who pulled off Barratt’s £2.2 billion cash acquisition of Wilson Bowden, a rival builder, last spring, months before the housing market began to stall, said yesterday: “The group continues to operate within its £2.6 billion of committed facilities and its banking covenants.”

Barratt’s four main lenders are HSBC, Royal Bank of Scotland, Barclays and Lloyds TSB.

Mr Clare said: “We are in discussions with banks. The focus is to make sure the facilities are in place. We are trying to review the financial headroom we have from the facilities we have and the first call is to find a way through this. We are staying within our covenants as we said at our interim management statement [in mid-May].”

A year ago Barratt’s shares were at almost £11, valuing the company at nearly £3.8 billion. Mr Clare criticised short-sellers for triggering the sharp sell-off in the shares yesterday.

Fears are growing that Barratt will be forced into a big debt-for-equity swap to relieve its debt burden amid a rapidly slowing housing market.

Yesterday short-sellers targeted shares in Barratt and Taylor Wimpey, Britain's largest housebuilder by production, and their peers Bellway and Redrow.

Fears were stoked by “sell” notes on their sector by Goldman Sachs and Merrill Lynch.

A further £400 million was wiped from the value of Britain's big seven housebuilders, taking to nearly £1 billion the value collapse since Friday.

Merrill said that all of the big seven quoted housebuilders were heading towards a repeat of the early 1990s, when the last house-price crash forced them to write down their land by hundreds of millions of pounds.

Mr Clare said that although Barratt would make some provisions on the value of its 600-odd sales sites at its year-end, these would be “limited”.

The chief executive added that Barratt was sticking to guidance given last month that it would meet analyst consensus forecasts for completed home sales of 18,300 and pre-tax profits, before one-off items, of £395 million.

“The only thing that has changed is that there are people out there for whom it may be in their interest to see share-price falls - that attaches to short-sellers,” he said.

Barratt's shares closed down 19p, or 21 per cent, at 72p, giving the company a market value of £251 million.

Persimmon sparked a sell-off in housing shares in April when it said that it had stopped building on new sites.