Barclays is planning to issue about £5 billion of new shares to help plug a £7 billion capital shortfall triggered by tough new UK rules, a source familiar with the matter has said.
Barclays said it had been in talks with Britain's financial regulator and would update the market alongside its half-year results published tomorrow.
The source said the £5 billion announcement could be made as soon as tomorrow.
It will be done as a rights issue, he said, where existing investors are given the opportunity to buy new shares so their stakes will not be diluted.
The Financial Times reported today that Barclays would launch a rights issue to raise more than £5 billion and would also detail plans to shrink its balance sheet.
The bank's shares fell more than 4% in anticipation of a flood of new equity.
Barclays declined to comment.
Barclays and other European banks are under pressure to comply with new regulation to constrain the industry's risk-taking that could prevent a re-run of the taxpayer bailouts that followed the financial crisis.
Regulators' new focus is on banks' leverage ratios, which do not rely on banks' own risk assessments but express a bank's capital as a proportion of its overall assets.
This has raised the stakes for banks across Europe. Deutsche Bank is expected to unveil plans to shrink its balance sheet when it reports second quarter results tomorrow.
Barclays needs about £7 billion to lift its leverage ratio to a 3% minimum demanded by the UK regulator from an estimated 2.5%, taking into account future losses on bad loans and mis-selling compensation.
"There's a strong rumour going around the market today that Barclays are looking to do a rights issue and straightforward convertible bonds," said one debt capital markets banker.
Convertible bonds give investors an option to convert them into equity.
Speculation about the share issue pushed Barclays shares down sharply. The bank was the biggest faller in Britain's FTSE 100 share index. Barclays' stock has more than doubled in value over the past 12 months.
Barclays declined to comment further on its plans. The Prudential Regulation Authority also declined comment.
A sale of new shares by Barclays could dent the British government's chances of offloading around a quarter of its 39% stake in Lloyds Banking Group, worth about £5 billion, later this year.
The Lloyds sale was expected in September or October, according to sources with knowledge of government thinking.
Barclays' plans could be determined by how much time it is given by the regulator to meet the leverage ratio target. It is expected to be given until the end of 2014 but a tighter deadline would make a sale of new shares more likely.
Sources familiar with the matter said last week that a rights issue was an option for Chief Executive Antony Jenkins, but not his preferred route. But Jenkins has remained in talks with regulators about how to hit the target over recent days and an equity fundraising has become more likely.
The bank has to make sure any bonds it sells would help its leverage ratio under the UK rules. To do this, the bonds would have to count towards Tier 1 capital, the key measure of a bank's financial strength. Similar bonds Barclays has sold, known as CoCos, have been classed as Tier 2 capital.
