Unscrupulous bankers will face criminal prosecution under far-reaching reforms designed to prevent a repeat of this summer's interbank rate-fixing scandal.
In a speech on Friday, Financial Services Authority (FSA) managing director Martin Wheatley revealed a 10-point plan to overhaul the Libor system and stamp out the "shocking behaviour" that led to systemic rate manipulation at the height of the financial crisis.
The process needs to be regulated by the FSA, with those that submit rates formally approved by the City watchdog and bankers who break the law subject to criminal sanctions, he said.
Accusing the British Bankers' Association (BBA) of having "clearly failed" in overseeing Libor, Wheatley said the BBA would see its responsibility for managing the process taken away.
It is inviting other groups to apply to take over the role overseeing Libor and wants the new managing body to draw up a code of conduct and carry out regular audits.
The Chancellor tasked Mr Wheatley with reviewing the Libor process in July following Barclays' £290m fine for rate-rigging.
Wheatley said while Libor did not need to be replaced, urgent reforms were vital.
He added: "The system is broken and needs a complete overhaul.
"The disturbing events we have uncovered in the manipulation of Libor have severely damaged our confidence and our trust - it has torn the very fabric that our financial system is built on."
The Treasury on Friday gave its initial backing to the review's recommendations and said it was clear self-regulation of the system had failed.
Greg Clark, Financial Secretary to the Treasury, said: "Libor is a hugely important international benchmark and this report makes a series of comprehensive and practical recommendations designed to restore its credibility."
Wheatley, head of the incoming Financial Conduct Authority, said the Libor scandal was not down to a few rogue traders, but was a "systemic problem" throughout the industry.
Barclays is the only bank to have been fined so far, but it is understood at least 15 banks globally are being investigated for possible Libor manipulation.
Wheatley said while banks need to be held accountable for their actions, there were also flaws in the Libor process that allowed manipulation to take place.
In a stinging criticism of the BBA, Wheatley said it was "careless" in its approach to policing Libor and put too much trust in a system that "did not have the right level of checks and balances in place".
He is setting up an independent panel to lead the appointment process for a new group to run Libor, which is set to be headed by Lady (Sarah) Hogg, chairman of the Financial Reporting Council.
In a detailed report of his review findings, Wheatley also outlines immediate changes that need to be made to Libor.
More banks should be encouraged to submit rates to make the Libor benchmark more representative, while the publication of individual submissions should be held back for three months to help prevent manipulation, he said.
The BBA said the review was an "essential step" toward reforming Libor and signalled it would accept Mr Wheatley's recommendation that oversight of Libor is handed to a new administrator.
"The absolute priority now for everyone is to ensure the provision of a reliable benchmark which has the confidence and support of all users, contributors and global regulators, and we will work closely with the Government and regulatory bodies to ensure this," added the BBA.
Consumer group Which? called on the Government to take forward the recommendations as soon as possible.
Richard Lloyd, executive director of Which?, said: "There must be no delay. Action must be taken to fix our broken banking system and bring a return to banks for customers, not bankers."
Wheatley later told BBC Radio 4's programme bankers guilty of fixing Libor in future could be jailed.
"Society has lost confidence in banks, in finance, in the whole system, and we need to restore that," he said.
"Society wants the people who commit these sorts of crimes to pay the price and if that includes jail for the most extreme fraud in the system, then that's what should happen."