UK mortgage rescue plan could come next week -source

By Matt Falloon

LONDON (Reuters) - British authorities are working on a plan to break a lending squeeze gripping the home loan market and could announce details as early as next week, a source close to the situation said on Thursday.

Pressure has been growing on the government and the Bank of England to do more to resolve a mortgage debt crisis that is threatening to slam the brakes on the British economy. News of possible swift action lifted sterling and boosted bank shares.

Banks' fear that high-risk mortgage debt is lurking on balance sheets has driven the interest rates at which they lend to each other well above the BoE's 5 percent benchmark, in turn raising borrowing costs for households and companies.

The new plan is expected to allow banks to temporarily swap mortgage-backed securities for government bonds to help free up their balance sheets and allow them to lend more to consumers.

The package "could come as early as next week. We're working closely with the Bank of England on this," the source told Reuters, on condition of anonymity.

"This is a high priority but the important thing is that we get the details right and we're focusing on that."

Finance minister Alistair Darling is due to meet mortgage lenders next week on his return from a visit to China.

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