The group - whose brands also include Scalextric, Airfix and Corgi - said recent UK trading was far worse than expected.
It now expects to post "substantially" wider underlying pre-tax losses for the full year, between Â£5.5m and Â£6m.
It revealed a Â£1m write-off after reviewing its stock and balance sheet.
The share price closed down by 50p to 31p.
Hornby said it was now in talks with its lender, as the scale of losses could see the firm breach its banking agreements.
The company has suffered major disruption from new computer and stock management systems, while European trading was also hit by troubles with suppliers in China.
The group had seen buoyant trading in the run-up to Christmas, when it said like-for-like sales rose 17% throughout November and December.
It said trading since the start of the new year had been in "stark contrast".
The Kent-based company said while UK trading was expected to improve in February and March, sales would still be "significantly" behind previous expectations.
International sales have also fallen short of forecasts, despite returning to growth, rising by 5% across December and January.
Richard Ames, chief executive of Hornby, said: "This has been a real year of change at Hornby.  Undoubtedly this is a disappointing result, but we have a strong portfolio of brands that we are determined to see flourish."
Shares in model rail company Hornby tumbled by 62% after the firm warned of mounting losses following a "disappointing" start to the new year.