Britain will announce a rescue package for the UK banking system tommorow, finance minister Alistair Darling said.
A government source with knowledge of the plan said today details were still being thrashed out but the package was likely to include public money being injected into banks.
However, the source played down media speculation the plan would include a stand-by facility to ensure that no banks run out of cash.
Mr Darling and British prime minister Gordon Brown met the heads of the Bank of England and Financial Services Authority tonight for what the government said were talks on stabilising the banking system.
"We have been working closely with the governor of the Bank of England, the FSA and the financial insitutions to put the banks on a longer-term sound footing," Mr Darling said.
"I intend to make a statement before the markets open tomorrow morning and I will make a statement to the House of Commons later in the day," he added in a televised statement.
Pressure mounted on the British government to take swift action to restore confidence after shares in the UK's major banks plunged.
Governments around the globe are fighting to unfreeze lending and borrowing brought to a halt by fears of hidden losses. In the latest of a series of emergency moves, Iceland's authorities took over the country's second-largest bank and Russia announced an aid package for its financial sector today.
UK banking shares dropped sharply today on talk that one of the options being considered by the UK was a massive injection of capital into the banks, which could dilute current investors' holdings. However, the cost of insuring banks' debt fell on hopes any new capital would take the pressure off existing debt.
HBOS was the biggest UK sector loser on Tuesday, finishing 41.5 pe rcent lower. Royal Bank of Scotland (RBS) ended down 39.2 per cent, having earlier dropped as much as 41 per cent to its lowest level since late 1993. Shares in Lloyds TSB were 12.9 per cent lower and Barclays shares dropped 9.2 per cent.
According to a BBC report, RBS, Lloyds and Barclays estimate they may need £15 billion each to help them get through the crisis, which began in the United States last year when mortgage holders began defaulting on payments.
JP Morgan analysts calculated last week that major British banks had a total capital shortfall of £46 billion, according to the Basel II capital adequacy standard.
Reuters