It should never have been happening. No one, not even the old hands on the City trading floor, had ever seen anything like it. But as dealers crowded around their continually changing screens last week, they realised that what they saw was real.

"It was absolutely extraordinary," said one London futures trader. "We were all gathered around the screen and everyone was just looking in disbelief. Then we hit the phones."

The largest single trade in German bond futures - with a stunning price tag of £11.5 billion sterling (£13 billion) - had just been put up for sale. Not in one lot but in a bizarre series of offers from a single seller that added up to 130,000 contracts.

Normally, dealers would see only 2,000 lots on their screens. This time there were 10 times as many at 11 different offer prices.

One trader said: "At first I thought this was a Rio trade which is where someone makes a last-ditch attempt to recover losses by betting their bank or, if that fails, books a one-way ticket to Brazil."

It was clear that someone - noone knew who because the trading system is anonymous - had made an enormous mistake. Probably the biggest blunder ever witnessed in modern markets.

At first there was silence. Even the most experienced traders didn't know what to do. Then they sprang into action. It had been a rising market all day and the vultures swiftly moved in to capitalise on the seller's mistake.

The deal was on the Eurex trading system, an electronic dealing market based in Frankfurt and financed by massive investment from the Swiss and German derivatives exchanges which are partners in Eurex. One hour after the contracts hit the screens, the DTB - the German end of Eurex - went into immediate secret session and declared that the trades should stand. It was to be a vastly expensive decision for the small German bank believed to have been the source of the deals. The bill it faces could be up to £10 million sterling (£11 million).

The bank had not made a bad commercial decision. It had suffered a cataclysmic security failure. A young trainee, working on a simulation of the market, had inadvertently slipped into the real world when he thought he was merely practising. It should not have been possible. But mistakes in the virtual reality inhabited by top dealers are no longer rare. What is unusual is for the loss to be so apparent and for the details to become public.

Only a couple of months ago, a trader on France's Matif derivative market caused consternation when he triggered a huge sell order in French bond futures after accidentally leaning on the "sell" key of his computer system.

The affair prompted a detailed investigation by the Matif authorities which concluded that the error was caused not by a faulty system but "the prolonged, unintentional and inadvertent operation of the `instant-sell' key by the trader". The button was triggered 145 times.

Matif called in Kroll Associates, a firm of forensic investigators, and computer experts CAP Gemini to look into the incident. They quoted a voice recording from the trading house concerned as saying: "We've done all this because we were on another screen and leaning against the keyboard and I guess we were trading."

In July, a trader at the London commodities group, ED&F Mann, attempted to sell natural gas futures on the International Petroleum Exchange's electronic system. He accidently dealt 100 times the intended volume. The cause of this error is said to have been a double click on the trader's mouse when one click was all that was required. That twitch cost ED&F Mann £250,000.

Earlier this year another trader, this time using the London Stock Exchange's new computerised SETS system, again hit the wrong button and accidentally sold 50,000 shares in the newly merged Guinness GrandMet drinks group at 15 per cent discount. The mistake was noticed and the deal was scratched but could have cost £170,000. The Stock Exchange agreed to review its system.

The relatively new Eurex trading system is supposed to be foolproof. Dealers need one password to access the simulation, another to switch to real time. A trainee would normally have only a simulation password. A spokesman for Eurex said it was impossible for someone to slip out of simulation mode without noticing.

But City bankers say it is not easy to tell the difference between training mode and real-life dealing if someone inadvertently forgets which one they are in. Only the word "simulation" in very small letters at the bottom of the screen indicates which system is in use.

Traders throughout Europe knew someone had made a catastrophic error. But that didn't stop them cashing in (although some did alert the DTB before they started making money). How did they know? The Eurex system is designed not to take sell orders of more than four digits - so the biggest command the dealer could effect in one go was 9,999 lots. However, he offered to sell 20,000 lots at 11 different prices, a series of transactions which would have involved between 20 and 30 separate key-stroke instructions. The real dealers pounced and took something like 35,000 lots at prices ranging from DM112.77 to DM112.82 (£45.37£45.39). Then they started to ramp the price. The German bank which had sold the bond and needed desperately to buy them back watched its losses grow by the minute as it waited for the DTB to rule whether the initial trades should stand.

City dealers were surprised that a trainee had been able to make such a mistake. "It is astounding that someone could execute a trade of this size without a check," said one.

"No one is kicking up a big stink because the market is said to have made £10 million out of it. If the market had lost money there would have been an outcry."

Mr Paul Cantwell, financial markets partner at IT company Andersen Consulting, which was involved in designing the London market system, said mistakes could never be eradicated. "These computers are designed for speed and movement and in the wrong hands, or experienced hands, things can go wrong."

A £10 million sterling loss on a £11.5 billion sterling trade would be too small to be picked up by a computer safety net, he added.

One senior London trader said it was "spooky" the way in which traders used to the open outcry floor at the London International Financial Futures Exchange (Liffe) treated screen-based dealing as if operating a Playstation. "They input orders in 3,000 and 4,000 lots for fun. It seems to be a compulsion. They like to see the big numbers."

At the moment the Liffe traders are only training. But the London exchange - prompted by the success of Eurex - is installing its own electronic systems. A spokesman for Liffe insisted the London system would be foolproof. "It has been designed in a way that its security framework would not allow such a mistake. It will be necessary to enter special security codes and press separate keys."

They said the same about Eurex.