Shares in the bank nosedived on the announcement which was issued two minutes before trading began, plummeting 7.04 percent to 10.16 francs, before recovering slightly to a loss of about 5 percent.
"UBS has discovered a loss due to unauthorised trading by a trader in its Investment Bank," the bank said in a statement.
"The matter is still being investigated, but UBS's current estimate of the loss on the trades is in the range of $2 billion."
The bank added that it may also be forced to report a loss for the third quarter due to the unauthorised trade.
It assured clients however that their positions were not affected.
When contacted, the bank would not give further details.
"It's a sad story for UBS, but also for a bank in Switzerland as a whole. Everyone is wondering how this could happen. What kinds of risk system did UBS have?" noted Claude Zehnder, chief analyst at the Zürcher Kantonalbank.
"UBS has sort of regained credibility, and now this happened," he said.
UBS has been fighting to restore its reputation after losing colossal sums in US subprime loans and the ensuing financial and economic crises of 2007-2008.
The bank had to be bailed out by the state, while clients exited en masse amid fears that it would go under.
In 2008 and 2009, the bank was also embroiled in a serious tax evasion spat with the United States.
It was forced to hand over 300 client names and pay a $780-million fine in a first case, before a second wider case in which it finally agreed to hand over data on 4,450 American clients.
The rogue trading incident could also force UBS to "think seriously about exiting investment bank as a whole or cutting it down substantially in size," noted Zehnder, pointing out that the unit was already one of the worst performers of the bank in recent years.
Traders say that the losses may have occurred in foreign exchange trades.
After the Swiss National Bank announced earlier this month that it would cap the franc rate against the euro at 1.20 franc, the franc-euro pair jumped 10 percent. Those who had open positions may have had their fingers burnt badly, they said.
In 2008, French bank Societe Generale uncovered rogue trading by one of its former employees Jerome Kerviel, whose unauthorised trades lost the bank €4.9 billion ($7.1 billion at that time).
Kerviel was later sentenced to five years in jail with two years suspended, and ordered to pay back the €4.9 billion, although the French bank said it would spare the trader from reimbursing the full compensation.