Speaking recently to the Treasury Select Committee, Bank of England governor, Mervyn King, warned that the UK economy will go into "a steep recession" if the commercial banks don't resume normal lending levels. "This was more important than anything else at present," he said, adding that the government "may have to intervene directly" to ensure the banks start to increase their lending.”

Mr King also stated his view that nationalising banks could not be ruled out. "I think given what we have seen it would be an extremely brave person that would rule anything out," he said when asked whether nationalising banks was a possibility. "It's very unlikely to be the first option. Remember that the government now owns the majority holding in shares in more than one bank."

In offering his backing for the Chancellor of the Exchequer's pre-Budget report, Mr King stressed that "domestically, the most pressing challenge is to ensure normal bank lending is resumed. Without that, the downturn in activity could become protracted and extremely damaging." He added that the economy "would see deflation come to pass" if lending continued to dry up. He denied suggestions that ministers had influenced the Bank's interest rate policy.

Adding weight to the governor’s call, Chancellor Alistair Darling told the BBC that the situation was "urgent", saying more banks needed to "step up to the mark" and increase lending to small firms. "If they do not do it we will have to consider what further action is appropriate," he said.

A spokesman for the Prime Minister said Mr Brown was "in close contact" about bank lending with the Bank of England and the Financial Services Authority: "We want to work constructively with the banks, we want them to fulfil the commitments they themselves entered into. It would be foolish to rule out any options at a time like this when there is so much change and these are such extraordinary times."