The lender's shares opened down as much as 17% and fell even further in UK afternoon trading after a brief rally, down 25% at around 203 pence at 1315 GMT.

Metro, which launched on British high streets in 2010, has struggled to rebuild investor confidence after disclosing a major loan book error in January that has wiped off more than 1.5 billion pounds of its stock value.

The bank ditched a 250 million pound bond issue on Monday after failing to attract investors, despite offering a hefty 7.5% yield.

Metro is required to raise bail-in debt known as "MREL" to meet an interim regulatory deadline of Jan. 1, 2020.

Lloyd Harris, a portfolio manager at Merian Global Investors, who recently exited Metro's existing bond, said he would not be surprised if regulators at the Bank of England gave the bank lender some leeway on its MREL requirements, designed to ensure that investors, and not taxpayers, absorb losses if a bank comes under financial stress.

"The headlines for Metro are gradually getting worse and from a funding perspective, it's not getting any cheaper. Most investors are better off being invested in contingent capital in a strong, stable bank, than in senior debt in weaker banks. At 7.5%, there are just better things to buy," Harris said.

"They raised the 350 million (pounds) in equity, which was great, and I still think the bank is in good shape from a balance sheet perspective – they are just being undone by the rules."

Analysts at Barclays said the failure made it more likely Metro would have to sell further chunks of its loan book, after offloading a portfolio of mortgages to private equity firm Cerberus earlier this year.

"Regardless of whether Metro can eventually issue, we think there's an increasing likelihood – and need - for Metro to dispose of 'non-core' assets," Barclays analysts said in a note.

Since Metro Bank's admission of its loan book error, the lender's shares are down more than 90%, making it the worst performing British bank stock in the FTSE 250 <.FTSE250> this year.

The mistake – which is subject to ongoing probes by regulators – led some business customers to pull money out of the bank and forced Metro Bank's founder Vernon Hill to announce plans to step down as chairman.

Metro Bank has been one of Britain's most shorted stocks this year, with hedge funds including Odey Asset Management betting the challenger bank's problems will get worse.

Almost 93% of Metro shares available to short had been utilised as of Monday, according to Astec Analytics data.

(Reporting By Iain Withers and Sinead Cruise, editing by Abhinav Ramnarayan/Susan Fenton/Jane Merriman)

By Iain Withers and Sinead Cruise