Business Secretary Vince Cable tonight launched a new onslaught on the banks, accusing them of "imperilling" Britain's economic recovery.

Cable used his annual set-piece address to the City to denounce the support offered by the banks to enterprising small and medium businesses as "second division".

Speaking at the Lord Mayor of London's trade and industry banquet at Mansion House, he said thousands of firms were trapped in a "valley of death" because they could not get the credit they needed to develop new products.

However he also used the speech to ditch his controversial proposal to break-up the Royal Bank of Scotland and create a "British business bank" specifically to increase the flow of credit to firms.

He admitted the scheme - which he "floated" in a private letter to David Cameron and Nick Clegg - would delay the return of the part-nationalised bank to the private sector and could fall foul of EU rules.

Nevertheless, Cable made clear his frustration at the unwillingness of the banks to lend, saying that having been responsible for the financial crash in 2008, they were now holding back the recovery.

"Britain's recovery is being imperilled by the parlous state of the very institutions that cause the crisis in the first place," he said.

He said there was a "yawning mismatch" between the needs of what he called "productive business" and the ability of the UK financial sector to service those outside the world of the "big corporates".

"I would go so far as to say that we have a financial services industry in London that plays in the Champions League, with overseas owners to match, and a British business finance system which struggles in the second division," he said.

"We have some of the world's smartest, most creative, financiers, doing brilliantly in the City or Canary Wharf while there are also smart creative British entrepreneurs - or even run-of-the-mill smaller businesses - still struggling to raise finance to operate and expand.

"They depend, as one put it to me the other day, on the three 'Fs': friends, family and fools - shunned by banks, unable to access equity markets."

He said the problem of the "disconnect" between the world of finance and the "real economy" was particularly hitting enterprising mid-sized companies which should be the engine of growth.

"It is especially acute for innovative firms who find themselves trapped in a 'valley of death' unable to raise funds to develop a proof of concept and cover the risks of early stage growth," he said.

"These firms are often the ones most effective at producing growth and jobs."

He acknowledged, however, that the solution was not his leaked proposal to carve a British business bank out of the predominantly state-owned RBS.

"It would almost certainly be necessary to lengthen the period in public ownership," he said.

"It may well mean state-controlled banks being able to lend at cheaper rates than new commercial banks, thereby affecting the development of more diverse finance.

"And even if they did these things, we would run into problems with EU state aid clearance."