NEW YORK - The banks may need a bigger bailout.

The government is mulling another multibillion-dollar aid package for Bank of America Corp., raising the possibility that much more taxpayer money will be needed to keep the banking industry from slipping back toward the abyss.

Investors took the news badly. Bank of America shares fell as much as 28 percent to their lowest level in 18 years Thursday before closing down 18 percent. Citigroup Inc. shares fell to a near 16-year low, closing down 15 percent, amid concerns about its stability. A grim earnings outlook from J.P. Morgan Chase & Co. escalated the pessimism. Its shares lost 6 percent.

But the sense of panic that has hovered over Wall Street in recent days does not seem to have breached Capitol Hill. Lawmakers, wary of pushback from constituents, reluctantly released the second $350 billion in the Treasury's financial rescue fund Thursday after assurances that $50 billion to $100 billion would be spent to try to reduce foreclosures. Many lawmakers have resisted giving banks more money.

The bank sector's tumble stoked investor fears that a darkening economic outlook is hurting government efforts to resuscitate the banking industry. And it raised the possibility that the $700 billion financial rescue package -- the largest in history -- might need to swell even further.

"The perception on Wall Street is that things are getting worse and that the banks are bearing the brunt," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

Bank of America, which already received $25 billion under the government's Troubled Asset Relief Program (TARP) could get billions more to help it absorb losses from its buyout of Merrill Lynch, according to a person with knowledge of the discussions, who spoke on condition of anonymity because of the sensitive nature of the discussions.

The plan could be modeled after a similar government lifeline that was thrown to Citigroup in November, the person said. Under such a plan, the government would give Bank of America another capital infusion and possibly guarantee any losses on problem loans.

Such a move would support the growing consensus among financial experts that the Treasury's bailout program hasn't been enough to stabilize banks reeling from bad mortgage loans and falling home prices. As the recession deepens, consumers and businesses are increasingly defaulting on other loans, such as those involving credit cards and commercial real estate, analysts say.

"It was getting better for a while, but now it's just going to hell," said Bert Ely, an independent banking consultant. "The worse it gets, the more the government is going to have to do -- and the problem is, we just don't know. There may have to be additional TARP money put on the table. ... There's nothing magic about the $700 billion number. That could be increased to a trillion, a trillion and a half in a flash."

The prospect of pumping more taxpayer money into Bank of America raised troubling questions about whether other banks may need more capital infusions.

Son of TARP?

"Will we need TARP 2.0?" asked Vincent Reinhart, former director of the Federal Reserve's monetary affairs division. "The first half wasn't used effectively, so we're certainly going to need the second half. But it probably won't be enough."

He said the fact that some of the money will be used for mortgage relief will mean there will be less money "to deal with the banking problem."

House Financial Services Committee Chairman Barney Frank, D-Mass., said problems in the financial sector could mean "we have to do more."

"Things have been worse than anticipated, there's no question," he said in an interview Thursday on C-SPAN. He compared the financial system to a patient under emergency care, saying, "You don't say, 'Well, that didn't work, I'm cutting it off.'"

But more government intervention into the banking sector would likely upset Republican lawmakers and could further unnerve investors worried about the health of major banks.

Investors also are wary about what Bank of America would have to give up in return for more bailout money. One possibility: The government could require the bank to slash its dividend paid to investors, analysts said.

"The market is very troubled by (a suspension of dividends)," said Edward Yardeni, an independent banking analyst. "Banks don't really have any value to shareholders if they can't pay dividends. It's not a growth industry."

At Citigroup, analysts are bracing for dismal fourth-quarter earnings numbers due Friday. Analysts polled by Thomson First Call, on average, predict a per-share loss of $1.19 for the fourth quarter -- which would be Citigroup's deepest deficit yet. The bank has posted losses for four consecutive quarters.

The New York-based bank has laid off thousands of employees and jettisoned several businesses, including its prized retail brokerage, Smith Barney, to raise cash.