The Financial Services Authority, the UK's financial regulator, said it is increasing the compensation limit for bank deposits to £50,000 ($88,000) from £35,000, from Tuesday 7 October.

Customers with joint accounts will be eligible to claim up to £100,000. The regulator also said the government will shortly be introducing legislation to revive consumer confidence in the banking sector.

The increases are being introduced at a time when a number of large banking groups around the world have gone bankrupt, been taken over and been partly or wholly nationalised due to the credit crisis. The credit crunch has fuelled fears among savers that they will lose some or all of their deposits.

The FSA will also consult on further reforms, such as whether the compensation limit should be even higher, how quickly the Financial Services Compensation Scheme can pay compensation and the rules surrounding whether deposits are covered on a legal entity, a “brand” or an “account” basis.

Hector Sants, FSA's chief executive, repeated UK finance minister’s Alasdair Darling’s pledge that the government will do what is necessary to maintain financial stability and protect depositors.

The move comes a day after Mr Darling contacted Irish finance minister Brian Lenihan following the Irish government’s move to guarantee all deposits for its six largest banks with a €400 billion package over two years.

The scheme was greeted with hostility in Europe, particularly as Minister Lenihan announced the plans without first notifying the EU competition commissioner Neelie Kroes. The UK government is unhappy at the prospect of British consumers flocking to open Irish accounts.

The Greek government was quick to follow suit, moving to protect all deposits held in domestic banks, with no upper limit and has also been joined by the German government which has made an unlimited promise to back savings.