Allianz, battered by tumbling markets and drained by mounting losses at ailing Dresdner Bank, yesterday set out plans to raise €5 billion to shore up its weak capital base and reduce pressure on its credit ratings.

The German group plans a heavily discounted €3.5-€4 billion rights issue and a €1.5 billion subordinated bond to boost its hybrid capital. But with investors still concerned about its restructuring, its shares were pushed almost 9 per cent lower in late Frankfurt trading.

Investment bankers described the cash call - the largest-ever fully underwritten rights issue - as a "a brave transaction" at a tricky time. It includes a reduction in its cross-holding with Munich Re, the reinsurer.

However, some said it could help draw a line under the growing fears of instability in the German financial sector, and reduce the recent volatility in Allianz's stock price.

The equity portion is being underwritten by Deutsche Bank, Goldman Sachs, Schroder Salomon Smith Barney and UBS Warburg, and is understood to carry fees approaching 5 per cent.

The fund-raising plan failed, however, to stave off a downgrade from Standard & Poor's. The agency cut the insurer's financial strength ratings from AA to AA minus, citing deteriorating performance and weak capital base, and has not ruled out further cuts.

Equity analysts viewed the move as a step in the right direction, but said the group remained weakly capitalised. "A further sharp fall in the markets could leave it coming back for more," said Mr Bob Yates of Fox-Pitt, Kelton.