Update: BP: Bankrupt Petroleum?

The fear that the gulf oil spill will force BP into bankruptcy swept the markets Wednesday afternoon.

Update 4:24 p.m.: BP (BP) shares plunged 16% in frenetic trading -- nine times the oil company's average daily volume -- amid speculation that a bankruptcy filing is at hand.

The cost of insuring against a default on BP debt surged 48% to a new high, CMA said. It now costs $382,000 annually to insure $10 million worth of BP debt against a default for five years. That's more than triple the going rate last month.

One oft-cited driver of Wednesday's action was an interview by Fortune's Nin-Hai Tseng of oil guru Matt Simmons, who said he believed the company would be bankrupt in a month as it faces mounting cleanup costs and legal exposure.

Others worried more mundanely, and perhaps more plausibly, that President Obama's pledge to kick ass at BP simply means the firm's rich dividend won't be paid.

The selloff, after all, comes after a coalition of nearly 50 lawmakers sent a letter Tuesday to BP chief  Tony Hayward, urging him to hold off on dividend payments till the full cost of the oil spill in the Gulf of Mexico is determined.

BP is currently scheduled to make a quarterly dividend payment June 21. The company paid $10.5 billion in dividends last year, according to its annual report.

"There's been a lot of talk from politicians that's got people running scared about potential dividend cut," said Alex Morris, an analyst who follows BP at Raymond James.

BP still has "plenty of cash flow," Morris said, adding that he thinks a dividend cut is not likely. But he acknowledged that "there is the potential they will bow to political pressure."

In any case, fears about the cleanup and legal costs tied to the spill, as well as questions about tighter regulation of the energy industry, have hammered oil stocks lately, and Wednesday was especially a downer.

Anadarko (APC), which has six deepwater drilling  commitments, plunged 19% to a 52-week low. Transocean (RIG), which has already said it would pay a $1 billion dividend starting in July, dropped 8% to a 52-week low of its own. Halliburton (HAL) dropped just 2% but saw the cost of insuring against a default on its debt surge 22%.

Though Wednesday's action was extreme, fears that BP would falter have spurred heavy action in the company's credit default swaps ever since the oil spill.

There were 1,718 CDS contracts outstanding on BP last week, according to data from the Depository Trust & Clearing Corp. trade information warehouse. That's up from 1,516 at the end of May, 1,326 at the start of May and 952 a year ago.

Meanwhile, BP stock has lost half its value in the six weeks since the spill, wiping out $90 billion in market value. Shares dropped $5.48 to $29.20.

Thanks to CNNMoney's Ben Rooney for the info on the dividend, including the interview with Morris and the Dear Tony letter.