Shares plunged 36% to 7p yesterday after Jarvis revealed it was negotiating £31m of new bank borrowings two weeks after saying it was "very unlikely" to need more from lenders.

The company is also in talks to issue new shares to holders of its £280m debt, which it confirmed "would leave existing shareholders with 5% or less of the equity value of the group".

While the current batch of investors will lose most of their money, Jarvis is already preparing to bring in new shareholders with a £50m rights issue.

The support services firm, chaired by former Tory minister Steve Norris, is negotiating with Deutsche Bank on a £31.4m short-term loan facility to meet its immediate needs. In March it borrowed £17m.

Jarvis has already been through massive changes after expanding rapidly in the late 1990s and becoming a major force in PFI under former chairman Paris Moayedi.

At the height of its success it was a £1bn company but is now worth barely £10m after an endless stream of bad news and mounting debts. It took on contracts with low profit margins and was badly tarnished by its association with the Potters Bar rail crash in 2002.

Management has been forced to sell off most of Jarvis's assets to save it. A stake in Tube Lines was sold for £147m and a property portfolio worth £20m has also gone. Jarvis's European roads portfolio, worth £25m, is also being sold, although this has been held up by French competition authorities.

The firm has also handed over control of more than a dozen PFI contracts for schools and hospitals.

If the financial restructuring is completed, the company will concentrate on road maintenance, rail renewal and plant hire.

Jarvis said the combination of the debt-for-equity swap and the equity raising would strengthen the balance sheet and reduce the debt level to "a low level". But it warned: "While these negotiations are at an advanced stage, there can be no certainty that final agreement will be reached."

Mark Howson, a support services analyst at ABN Amro, said the announcement was very disappointing for those investors who had loyally continued to hold stock hoping for better days.

"The issue now is whether [a share price of] 7p adequately discounts the value of the proposed debt-for-equity deal, and does it adequately reflect the 50% chance that the rail renewal business could be taken in-house by Network Rail in four years' time," he added.

The company has been through a procession of senior directors, including a change of finance director in March. This was its second change in the post in less than a year. Alan Lovell, the chief executive, took over from Kevin Hyde last autumn.

The Treasury advised local authorities as early as last summer to draw up contingency plans to safeguard PFI school projects in the event of Jarvis going into administration.

Work stopped and was delayed by up to nine months on some PFI contracts but Jarvis said last night all these schemes were now proceeding.