A £40-50 billion taxpayer-funded life-belt for high street banks is being considered by ministers as a last resort.

The Government could end up with sizeable stakes in Barclays, Royal Bank of Scotland, Lloyds TSB and HBOS by injecting fresh capital into them in return for preference shares.

The idea would be to beef up the banks’ balance sheets while partly protecting taxpayers by taking a type of share that gives priority over ordinary shareholders.

Alistair Darling, the Chancellor, is understood to see the scheme as a last resort if other measures fail to restore confidence and bank shares continue to plunge. But in the Commons yesterday, he gave warning about the danger of rushing forward with a scheme before the details were properly worked out.

Addressing MPs on the first day after the summer recess, Mr Darling said that the Government would support the banking system as a whole, as well as intervening in particular cases such as Northern Rock and Bradford & Bingley. The Government was ready to do “whatever is necessary”. According to one banking source, the money would be injected in two tranches, with some invested immediately and some contingency money held back for a second dose if needed. The aim would be to give taxpayers some of the benefit if the banks recovered. This could either take the form of rights to convert the preference shares into ordinary shares at a cheap preagreed price, or the gift of warrants - an option to buy new shares at a preagreed price.

Addressing the Commons yesterday, Mr Darling made no mention of the scheme, but made it clear all options were possible.

Officials see last week’s $5 billion capital injection by the billionaire investor Warren Buffett into Goldman Sachs as a possible template. Mr Buffett not only received preference shares paying a generous 10 per cent interest rate, but also options to buy ordinary Goldman shares at a relatively cheap price.

The recapitalisation plan was thought to be one item on the agenda for a meeting scheduled for last night between Mr Darling and bank chief executives.Such a plan could infuriate ordinary bank shareholders because it would reduce the value of their shares. But the Government will be aided by new legal powers gained since the start of the credit crunch. Under the Banking (Special Provisions) Act 2008, passed specially to deal with the collapse of Northern Rock, the Government has the power compulsorily to acquire the securities of any UK-based bank or building society. The legislation requires no threshold for nationalisation other than that the Treasury deems it “desirable”.

There was government irritation that the Conservatives had begun calling for recapitalisation over the weekend. Gordon Brown, when he appeared at a private meeting of Labour MPs, accused the Tory leadership of leaking private briefings and mocked claims that the party wanted a bipartisan approach to the financial crisis.

There were claims that the Tory leadership had learnt from a briefing with the Governor of the Bank of England of his support for such a scheme and had assumed it was about to be announced by the Government.

The Government’s room for manoeuvre was complicated by a chaotic day in Europe as the veneer of EU cooperation over the credit crunch was shattered by governments rushing to follow the Irish Republic, Greece and Germany in guaranteeing all bank deposits.

Markets woke up to new unilateral guarantees by Austria and Denmark, with Sweden more than doubling the size of its government-backed scheme. Portugal announced its own guarantee during the afternoon and Spain threatened to follow suit.

Germany’s plans evolved during the day. At lunchtime Angela Merkel, the German Chancellor, explained that her country’s federal guarantee of bank deposits to the tune of €563 billion was similar to the British pledge to do “whatever it takes” – a “political commitment” that fell short of legislation.

Gordon Brown was told last night that the threat to his leadership had gone. George Howarth, the former minister who in the summer called for Mr Brown to stand down, told him at a meeting of Labour MPs and peers: “Hostilities are now over.” The remark was greeted with loud cheers.

Peter Mandelson spent much of his first day as Business Secretary in hospital having a kidney stone checked. Mr Mandelson, 54, had complained of feeling unwell and was taken to St Mary’s hospital in West London where tests confirmed the presence of a small stone. He attended the meeting of the National Economic Council and later returned to St Mary’s.

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