The UK government has acted to recapitalise and provide financial liquidity for eight leading banks and lenders, including HSBC, Royal Bank of Scotland and Barclays, to avoid a financial meltdown and restore confidence in the system.

Meanwhile, the government also acted to protect UK savers in a number of Icelandic-based banking groups that have fallen into trouble.

In a statement issued this morning before the UK stock market opened, the government said that against a background of "extraordinary market conditions", the Bank of England will take "all actions necessary" to ensure that the banking system has access to sufficient liquidity. In its provision of short term liquidity, the BoE will extend and widen its facilities in "whatever way is necessary" to ensure the stability of the system.

At least £200 billion ($352 billion) will be made available to banks under a Special Liquidity Scheme. Until markets stabilise, the statement said the BoE will continue to conduct auctions to lend sterling for three months, and also US dollars for one week, against extended collateral.

In addition, the government is establishing a facility, which will make available Tier 1 capital in appropriate to eight "eligible institutions": Abbey; Barclays; HBOS; HSBC; Lloyds TSB; Nationwide Building Society; Royal Bank of Scotland and Standard Chartered.

These banks and mortgage lenders said they will increase their total Tier 1 capital by £25 billion, an aggregate increase. The government said it would provide at least £25 billion of further support for all eligible institutions, in the form of preference shares or other assistance.

The government said it will also make available - for an interim period - guarantee of new short and medium term debt issuance to assist in refinancing maturing, wholesale funding obligations as they fall due.

The massive public bail-out comes after a day of turmoil on the London stock exchange, where shares in banking group RBS - which owns the UK private bank Coutts - fell 39 per cent to add to a 20 per cent tumble the day before. Rival HBOS fell by 41 per cent.

Meanwhile, HSBC, RBS and the UK banks face the most debt coming due in at least 10 years as the credit market seizure raises borrowing costs to the highest on record, according to Bloomberg.

The six largest British banks have £54 billion ($95 billion) of debt to refinance by April, triple the amount of the year-ago period. HSBC and RBS each have about £11.5 billion of debt due, while Barclays has £15.9 billion maturing, the data show.

In a separate statement, the government said it will also protect retail depositors in two Icelandic owned banks: Icesave, a UK-based branch of Landsbanki and Heritable, a UK-based banking subsidiary of Landsbanki.

"The UK authorities expect that Landisbanki will soon be declared in default. Should that occur, the Chancellor [Alistair Darling] has put in place arrangements to ensure that no retail depositor will lose any money as a result of the closure of Icesave," the government said. 

The UK has also today taken steps to freeze assets of Landsbanki in the UK until the position with respect to the future of the firm and UK creditors becomes clearer.

The FSA, meanwhile, has determined that Heritable is likely to be unable to continue to meet its obligations to depositors and  in default for the purposes of payments from the UK Financial Services Compensation Scheme. Heritable’s retail deposit business has been transferred to ING Direct, part of the Dutch financial conglomerate ING.

EU finance ministers said on Tuesday that each of the bloc’s 27 member states would be free to adopt measures ranging from recapitalisation, the purchase of bank assets and state-backed guarantees of bank liabilities.

Lobby groups and financial institutions reacted differently to the measure. The TaxPayers' Alliance, a UK public advocacy group, said the use of public funds to bolster banks was a mistake.

"The Government is using taxpayers’ money as an easy way out, and haven't fully explored other options that don't put £50 billion of our hard-earned cash on the line. With ordinary taxpayers' money at stake, they must put mechanisms in place to ensure that the money isn’t frittered away on excessive bonuses and to make sure that it is not wasted," Matthew Elliott, Chief Executive of the TaxPayers’ Alliance,  said.

The Financial Services Authority, the UK financial regulator, welcomed the steps taken by the government, however. "The comprehensive package announced today will ensure that our banks and building societies are undoubtedly robust. It should restore confidence to the whole financial system," Adair Turner, chairman of the FSA, said.

Fears of a global recession outweighed the supposedly confidence-building intent of the UK package. The FTSE 100 index of blue-chip stocks fell by as much as 6.8 per cent. So far this year, the index has dropped by more than 30 per cent.

Barclays Wealth said steps taken by the UK and other Western governments were so far proving inadequate: "Judging by the intensified market meltdown, policymakers are failing to reassure investors that they have a comprehensive strategy to stem the financial collapse."

"The packages adopted by various countries include extraordinary measures, but do not alleviate the impression of the authorities being "behind the curve". We expect that, with any day that this turmoil continues, the likelihood of a response by G7 countries later this week, including that of coordinated substantial rate cuts, is rising – Hong Kong, for instance, followed Australia and cut rates by 100bp overnight – but it is unclear this will be enough," Barclays Wealth said.