The rouble opened around 10 percent stronger against the dollar after the central bank unexpectedly raised its benchmark interest rate by a hefty 650 basis points to try and halt the currency's slide, but it reversed gains in volatile trade and repeatedly set new record lows.

It has now fallen close to 20 percent this week, taking its losses this year against the dollar to over 50 percent and raising memories of the crisis in 1998 when the currency collapsed within a matter of days, forcing Russia to default on its debt.

Although Russia's public finances and reserves are much healthier than in 1998, analysts say the country is on the brink of a full-blown currency crisis.

At 1435 GMT, the rouble was down around 11 percent against the dollar at 72.44 after earlier racing past 80 roubles per dollar for the first time to be down around 20 percent at one stage from the previous close.

Against the euro, it was almost 13 percent weaker at 90.50 .

The rouble has been hit by the slump in oil prices and Western sanctions imposed over Russia's involvement in Ukraine, but its sharp decline over the past two days also reflects declining confidence in the central bank.

The 650-basis-point rate hike, less than a week after another 100-basis-point rise, was seen as a sign of desperation by the bank, whose Governor Elvira Nabiullina now appears powerless to stop the currency's slide, raising the risk of capital controls.

The market ignored Nabiullina's comments on Tuesday that the rouble was undervalued.

"If such an interest rate rise didn't impress the market, then they (the central bank) have left the option of interventions of $10 billion a day. They are in (the market) every day," said Natalia Orlova, chief economist at Alfa Bank.

Investors were also unnerved by the prospect that Russian oil major Rosneft (>> Rosneft' NK OAO), which recently issued 625 billion roubles ($8.67 billion) in bonds, could convert the funds into foreign currency, adding further pressure on the rouble.

Rosneft has said the money will not be used to buy foreign currency.

Russia's dollar-denominated RTS share index <.IRTS> was down as much as 19 percent at one point, extending heavy losses from Monday, and shares in top bank Sberbank (>> Sberbank Rossii OAO) - seen as a barometer for the wider economy - plunged over 20 percent.

Russian sovereign dollar bonds fell and money market rates jumped.

President Vladimir Putin has blamed both the slide in oil and the rouble on speculators and the West. A weak rouble poses a major test for Putin, since his popularity in part depends on his reputation for guaranteeing prosperity and stability, and it stokes inflation.

"The central bank will have a very hard time stabilising the rouble as long as the sharp sell-off in oil prices continues," Vladimir Miklashevsky, an economist at Danske Bank, said in a note.

Brent crude prices fell below $60 on Tuesday for the first time since July 2009, hurting the outlook for Russia's oil-dependent economy, which the central bank says is likely to contract early next year.

The central bank has spent over $80 billion defending the rouble this year, including more than $8 billion since it floated the currency in November.

The country still has ample reserves of around $416 billion but analysts say the currency is in dangerous territory as it is increasingly being driven down by sheer panic.

"What now rules the Russian currency is not oil, or even waiting for it to move, but panic fuelled by a large number of rumours about the return of our country to the "98-year" regime," said Alena Afanasyeva, a senior analyst at Forex Club in Moscow.

(Reporting by Lidia Kelly, Vladimir Abramov, Alexander Winning, Katya Golubkova and Elena Fabrichnaya; Editing by Elizabeth Piper and Susan Fenton)

By Alexander Winning and Vladimir Abramov

Stocks treated in this article : Sberbank Rossii OAO, Rosneft' NK OAO