Bitcoin, invented in the wake of the global financial crisis by a mysterious computer guru, is a form of cryptography-based e-money that can be stored virtually or on a user's hard drive, and offers a largely anonymous payment system.
Speculators drove China's Bitcoin prices into the financial stratosphere last year, peaking at 7,588.88 yuan (now AU$1,324.32) in November, before they crashed following moves by exchanges, financial institutions and the government to rein in the virtual currency.
"From this date, any institution or individual must not use accounts set up with our bank for the deposit and withdrawal ... and transfer of funds for Bitcoin and Litecoin trading," the Industrial and Commercial Bank of China (ICBC) said in a statement on Thursday.
Litecoin is another virtual currency.
The move aimed to "protect the property rights and interests of the public, prevent money laundering risks as well as to safeguard the status of the renminbi as the legal currency", ICBC said, referring to China's yuan currency.
China tightly controls the yuan and enforces capital controls, which e-currencies threaten by their very nature.
ICBC threatened to suspend and close bank accounts if clients failed to comply with the new rules.
In its annual financial stability report released late last month, China's central bank labelled Bitcoin "a tool for speculation" and warned against risks the e-money could pose to capital flows as well as its possible use in illegal activities, including drug dealing and money laundering.
Last month, the central People's Bank of China instructed banks and third-party payment providers to "completely cut off the capital chain" for Bitcoin trading, the Southern Metropolis Daily newspaper reported.
The central bank has so far made no public statement to confirm the action but at least 11 banks have ceased providing services related to Bitcoin, according to separate announcements.
They include China's "Big Four": ICBC, Bank of China, China Construction Bank, and Agricultural Bank of China.
The moves have hurt the value of Bitcoin in China. On Thursday morning, Bitcoin was trading at 2,762.00 yuan each on China's largest exchange BTC China, down 12 per cent from April 25 when banks began announcing the bans.