Bank of America Corp shares sank below $3 and Citigroup Inc tumbled below $2 on Friday, hammered by growing fears that the U.S. government could nationalize the banks, wiping out shareholders.

In a roller-coaster session, the shares fell as much as 36 percent after Sen. Christopher Dodd, a Democrat who chairs the Senate Banking Committee, said it might be necessary for the government to take control of some banks. They recovered some losses after the White House said President Barack Obama favored a privately held banking system.

If Obama were inclined to take control of troubled banks -- and the bank rescue plan recently outlined by Treasury Secretary Timothy Geithner leaves that question unanswered -- he would be taking a political gamble as the country is showing signs of bailout fatigue.

Citigroup shares closed down 56 cents, or 22.3 percent, at $1.95 after earlier hitting $1.61, their lowest level since 1990. Bank of America closed down 14 cents, or 3.6 percent, at $3.79, after falling to $2.53, their lowest level since 1984.

Both stocks have lost more than 90 percent of their value in the last year. Shares of Citigroup rose 27 cents to $2.22 after hours.

Through the close, Citigroup's market capitalization had shrunk to $10.6 billion, making it worth less than asset administrator Northern Trust Corp. Bank of America, the largest U.S. bank by assets, was worth $24.2 billion.

Both banks have taken $45 billion of capital from the federal government since October, and gotten a federal backstop on losses related to toxic assets.

The values of the companies seem so ridiculously depressed because no one believes in their values, and no one believes in their values because they think the government is going to take them over, said Ken Crawford, senior portfolio manager at Argent Capital Management.

Crawford said the government could be forced to nationalize Citigroup and Bank of America if their share prices keep falling and their survival is at risk.

The KBW Banks Index fell 0.6 percent, with Wells Fargo Co sliding 9 percent to $10.91, and JPMorgan Chase & Co ending down 3.4 percent at $19.90.

Bank of America Chief Executive Kenneth Lewis said in a statement, We see no reason why a company that is profitable with strong levels of capital and liquidity and that continues to lend actively should be considered for nationalization.

Citigroup spokesman Jon Diat said in an e-mailed statement that the bank's capital base is very strong.

Last month, Bank of America posted its first quarterly loss in 17 years, and said Merrill Lynch & Co, which it bought on January 1, lost $15.31 billion in the fourth quarter.

Citigroup has lost $28.5 billion in the last 15 months, hammered by bad debts and toxic assets.

We are still in the middle of a severe banking and financial market crisis -- and it's getting worse, said Nouriel Roubini, a prominent New York University economist who forecast much of the credit and housing recession.

The cost of insuring $10 million of Citigroup debt for five years rose to $475,000 annually from $405,000 on Thursday, according to data from Phoenix Partners Group. The cost of insuring Bank of America debt rose to $275,000 a year from $245,000.

'STRESS TEST' DUE

In coming weeks, the U.S. Treasury is expected to subject up to 25 banks, with assets exceeding $100 billion each, to stress tests to decide which need additional capital.

The nationalization of a bank need not be a permanent issue, Roubini added. However, he said, we have to take over some banks.

Dodd agreed it may be necessary to nationalize some banks for a short time, although he acknowledged the government was trying to avoid that action, according to an interview with Bloomberg News.

Later, White House spokesman Robert Gibbs said the Obama administration believed that a privately held banking system is the correct way to go.

Support for nationalization seems to be growing, even among some Republicans.

Sen. Lindsey Graham, one of the Senate's more conservative members, said recently that nationalization could be an option and former Federal Reserve Chairman Alan Greenspan has said government intervention could be the least bad alternative.

French Economy Minister Christine Lagarde said in New York that there is nothing wrong with nationalizing financial institutions that have defaulted and failed and added that world leaders are committed to preventing another failure of a major bank as happened to Lehman Brothers.

Lehman's September bankruptcy filing helped trigger a meltdown at American International Group Inc that essentially nationalized the insurer and is widely believed to have helped worsen the stock market's tailspin last fall.

Last July, the former Bush administration and the Federal Reserve effectively nationalized mortgage finance companies Fannie Mae and Freddie Mac in a bid to back the U.S. housing market.

(Additional reporting by Sitaraman Shankar, Dominic Lau and Olesya Dmitracova in London; Peter Starck in Frankfurt and Elinor Comlay, Dan Wilchins and Jennifer Ablan in New York; Editing by Andre Grenon, John Wallace, Bernard Orr, Richard Chang)

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