The financial markets have punished insurance giant Royal & Sun Alliance (RSA) for reports that the company is facing an asbestos liability lawsuit.

RSA stock closed down 10% at 104p amid fears that a verdict against RSA would put the company's strained finances under further pressure.

The case is being brought by former asbestos producer Turner & Newall (T&N), which argues that RSA had insured it against possible claims from its employees.

A High Court judge said earlier this week that claims from former T&N employees could be "very substantial".

Liability denied

RSA, which earlier this year doubled the cash it has set aside for asbestos claims, denies that it had provided T&N with cover for asbestos-related risks.

"We provided T&N with employer liability policies, but within those are a number of exclusions," an RSA spokesman told BBC News Online.

T&N, owned by US engineering firm Federal-Mogul, is taking similar action against a Lloyds of London syndicate which also provided it with insurance cover.

News of the case against RSA comes as European engineering giant ABB battles potentially ruinous asbestos claims levelled against one of its US subsidiaries.

In the US, hefty asbestos damages have pushed about 60 companies, including some major corporations, into bankruptcy.

Cash shortage

The court battle comes at a difficult time for RSA, which in September sacked its former chief executive Bob Mendelsohn after missing its financial targets.

Investor confidence in the firm has also been hit by reports that it plans to build up its depleted cash reserves by issuing new shares, a move that would dilute the value of its existing stock.

The company is thought to be in need of an injection of cash in order to fund its future growth plans.