Government to unveil major bank rescue package

By Sumeet Desai and Frank Prenesti

LONDON (Reuters) - Chancellor Alistair Darling will announce a rescue package for the banking system on Wednesday, a move likely to include a major injection of capital into banks, a government source said.

The decision follows days of crippling pressure on high street banks, some of which have lost nearly half their value on the stock market amid investor fears they could collapse if they are not handed a multi-billion-pound liquidity lifeline.

Darling is due to make an announcement at around 7 a.m., before the markets open. The European Commission, which must approve state support programmes, said it had been informed of the plan and would make a decision quickly once it had details.

Media have suggested the package could involve a stand-by facility that would effectively allow banks to tap as much money as they need, but the source, while confirming the package would be large, downplayed those suggestions.

"There will be an element of recapitalisation for the banks," he said, but added: "A lot of the speculation that's out there at the moment is wide of the mark."

One possibility mooted by financial analysts would be for the government to take stakes in struggling banks and in return receive preference shares, which would allow the taxpayer potentially to benefit should the banks turn around.

Darling and Prime Minister Gordon Brown met the heads of the Bank of England and Financial Services Authority (FSA) on Tuesday 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 institutions to put the banks on a longer-term sound footing," Darling said in a televised statement following that meeting.