BANK OF America - the ambitious commercial bank that has snapped up Countrywide Financial, the mortgage lender, and Merrill Lynch, the historic investment bank, since the credit crisis began - is to raise $10bn and slash its dividend to bolster its finances.

The company made the surprise announcement last night, alongside disappointing financial results and after saying it had agreed the largest-ever settlement of predatory lending claims which will cost it $8.6bn.

Ken Lewis, Bank of America chief executive, said the banking industry was facing its most challenging times in the 38 years of his career, and said it was "prudent" to raise cash while he could. The company's shares dived 10 per cent in after-hours trading on concerns about the dilution to existing shareholders from the new fundraising, and because of the deteriorating outlook for consumer lending. Soaring provisions for bad loans meant that earnings per share for the latest quarter were 75 below Wall Street's forecasts.

Earlier in the day, Bank of America signed a legal settlement that will allow hundreds of thousands of Americans to cut their mortgage payments and stay in their homes. Eleven US states had sued Countrywide Financial, claiming that its representatives foisted unsuitable loans on people who had little chance of repaying them. Nearly 400,000 Countrywide customers will now have the terms of their loans changed, with reduced interest rates or a one-off cut in the amount of money they owe.

"With this settlement, homeowners will receive direct relief from the catastrophic damage caused by Countrywide," said Edmund Brown, California's attorney general. "Countrywide's lending practices turned the American dream into a nightmare for tens of thousands of families by putting them into loans they couldn't understand and ultimately couldn't afford."

Until two years ago, Countrywide was the largest US mortgage lender, and its pugnacious chief executive, Angelo Mozilo, was one of the biggest cheerleaders for sub-prime mortgages.

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