Deutsche Bank shares staged a dramatic recovery on Friday afternoon after reports emerged that it could only have to stump up 5.4 billion US dollars (£4.1 billion), rather than 14 billion US dollars (£10.5 billion), as part of a US Department of Justice settlement.

The German lender's shares had slipped to 9.98 euro at one point, their lowest level since the 1980s, but recovered and were trading 7.5% up at 11.70 euro in afternoon trading.

Deutsche's US shares were 12.89% up at 12.96 US dollars.

The morning collapse followed reports overnight that 10 hedge funds had reduced their exposure to the lender and have taken their business elsewhere.

The news spooked investors, who continued a dramatic sell-off until late in the day, when a fresh report by Agence France-Presse suggested that a 14 billion US dollar (£10.5 billion) settlement proposal, linked to the sale of mortgage-backed securities during the financial crisis, may be reduced to 5.4 billion US dollars.

Jasper Lawler, analyst at CMC markets, said: "Deutsche Bank shares recovered all of the day's sharp losses on rumours the fine will be announced at the weekend as 5.4 billion dollars.

"Even at 5.4 billion dollars, Deutsche Bank would likely to raise capital, though the size may make a rights issue more palatable and makes a government bailout much less likely."

Prior to the rally, chief executive John Cryan was forced to write an open letter to staff, saying that the news about hedge funds has sparked "unjustified concerns".

"We should consider this in the context of the bigger picture: Deutsche Bank overall has more than 20 million clients.

"I understand if you feel concerned by the extensive coverage on this issue. Our bank has become subject to speculation. Ongoing rumours are causing significant swings in our stock price.

"It is our task now to prevent distorted perception from further interrupting our daily business. Trust is the foundation of banking. Some forces in the markets are currently trying to damage this trust."

The rollercoaster rise was described by the chief executive of the Berlin stock exchange as investors "playing with dynamite".

Artur Fischer blamed a disconnect between perception and reality for the dramatic plunge in the bank's share value.

Asked on BBC Radio 4's World At One if the markets were playing with fire, Mr Fischer said: "Definitely. You could say playing with dynamite."

As share prices in the troubled bank continued to tumble, Mr Fischer said: "The market bets that the German government will do a bailout even though there is no need for that at this point in time at all.

"We have a disconnect between perception and reality. Reality is what you have in the balance sheet of Deutsche ... they have three times as much capital than what the share value is, so the reality is actually much better than the perception. But the perception at the end counts, so people act on perception."