It will initially make the extra capital available to eight of the UK's largest banks and building societies.

In return for the funding, the government will receive preference shares in those institutions.

The money will be used to prop up the banking system that has seen share prices plunging in recent weeks as banks have struggled to access funding.

As part of the package, a further £200bn will be made available by the Bank of England for short-term borrowing to provide liquidity to banks and building societies.

The banks that have confirmed they will take part in the scheme are Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland and Standard Chartered.

The Treasury said that other banks would be able to apply for inclusion in the plan.

BBC business editor Robert Peston said there would be strings attached for banks that take the government money.

These will include restrictions on executive pay and dividends for other shareholders.

"Taking taxpayers' money will not be a licence to trade as normal," he said.

BBC