American International Group, the insurance company, sent fresh tremors through the markets yesterday when it increased its estimates of losses in October and November from insuring mortgage-related instruments from about $1 billion to nearly $5 billion.

The announcement came as a number of companies are preparing to release audited accounts for 2007. Auditors have been trying to encourage a common approach to valuation amid predictions this will shed new and harsh light on the full scale of the financial damage caused by the subprime crisis.

AIG produced the revised figures after its auditors, PricewaterhouseCoopers, concluded there was a "material weakness" in the way it valued its exposure. AIG, the world's biggest insurance company by assets, saw its shares tumble 11 per cent, wiping $14 billion off its market value.

Measures of credit risk in both the US and Europe reached new record levels indicating widespread investor risk aversion.

This followed persistent pressure on the markets last week amid fears about corporate and commercial property debt defaults.

Shares in European insurance companies fell heavily on the news, though observers said that most did not have such exposure to US credit markets and used different accounting policies.

AIG's move came after Peer Steinbrück, Germany's finance minister, warned at the weekend that losses on securities linked to US subprime mortgages could reach $400 billion.

Some of those losses will be borne by companies such as AIG which have provided insurance for investors in collateralised debt obligations, complex instruments composed of mortgage-backed bonds. AIG has written $78 billion of credit default swaps on CDOs, which protect the purchaser from a CDO's failure to pay.