An emergency bank funding scheme to kick-start lending to households and businesses was proposed by Chancellor George Osborne tonight.
In his speech at the annual Mansion House event, the Chancellor said he would work with the Bank of England to develop a "funding for lending" proposal to ward off a worrying new phase of the credit crunch.
Under the proposals, British banks - facing higher funding costs and under pressure to put more capital aside - will be offered vital funding at low interest rates.
But the funding will be linked to bank lending performance in what marks a direct attempt to free-up the log-jam in credit hitting the economy.
The scheme is expected to be in place within a few weeks and will last for four years.
The Chancellor said: "We are not powerless in the face of the eurozone debt storm."
He added: "The Government - with the help of the Bank of England - will not stand on the sidelines and do nothing as the storm gathers.
"We are rolling up our sleeves and doing everything possible to protect British families and firms."
He said: "The Government has sought to keep the British economy safe in the storm, while sharpening our competitive edge for the future."
Before the speech a man dressed in black tie tried to present the Chancellor with an exercise book with GCSE Maths written on the front. The man was pulled away from Mr Osborne and is not thought to have been arrested.
Today's moves follow increasing calls for action from the Bank and Treasury to do more to help banks and steer the UK economy through the eurozone crisis.
Andrew Tyrie, chairman of the Treasury Select Committee, said: "This looks very encouraging. The measures look as if they will encourage lending to businesses by ensuring liquidity is more easily available to banks.
"These are exceptional circumstances. They require exceptional measures.
"It is not just welcome that the Treasury and the Bank of England are working together to secure recovery. It is essential."
The Bank of England is soon to take charge of prudential regulation under a shake-up of financial regulation.
Mr Osborne said he was also adding a new growth remit for the bank's Financial Policy Committee as part of aims to shore up the UK's battered economy.
Earlier in the year, the Government launched the National Loan Guarantee Scheme - also known as credit easing - under which £20 billion was made available to small businesses.
The scheme will allow businesses to borrow - through participating banks - at the same low-interest rates at which the Government currently borrows as a result of the UK's perceived safe-haven status from eurozone turmoil.
Shadow Chancellor Ed Balls said: “The Bank of England’s new funding for lending scheme is a significant admission that the government’s existing policies have failed. Businesses will be desperately hoping it is more successful than George Osborne’s Project Merlin and credit easing schemes which have actually seen net lending to businesses fall."