By Sumeet Desai and Frank Prenesti
LONDON (Reuters) - Britain's Finance Minister Alistair Darling will announce a rescue package for the UK banking system on Wednesday and a government source said it was likely to include public money being injected into banks.
However, the source played down media speculation that the plan, intended to help banks deal with the impact of a global financial crisis, would also include a stand-by facility to ensure that no banks run out of cash.
"There will be an element of recapitalization for the banks," the source said, but added: "A lot of the speculation that's out there at the moment is wide of the mark."
Details are expected to be finalized overnight and an announcement made at around 2:00 a.m. EDT.
Darling and British Prime Minister Gordon Brown met the heads of the Bank of England and Financial Services Authority on Tuesday evening for what the government said were talks on stabilizing the banking system.
"We have been working closely with the governor of the Bank of England, the FSA and the financial institutions to put the banks on a longer-term sound footing," Darling said in a televised statement following that meeting.
"I intend to make a statement before the markets open tomorrow morning and I will make a statement to the House of Commons later in the day."
Governments around the globe are fighting to unfreeze lending and borrowing brought to a halt by fears of hidden losses. In the latest of a series of emergency moves, Iceland's authorities took over the country's second-largest bank and Russia announced an aid package for its financial sector on Tuesday.
Pressure mounted on the UK government to take swift action after shares in its major banks plunged on Monday and Tuesday. This followed reports that one of the options being considered by the UK was a massive injection of capital into the banks, which could dilute current investors' holdings.
However, the cost of insuring banks' debt fell on hopes any new capital would take the pressure off existing debt.
HBOS was the biggest UK sector loser on Tuesday, finishing 41.5 percent lower. Royal Bank of Scotland (RBS) ended down 39.2 percent, having earlier dropped as much as 41 percent to its lowest level since late 1993.
Shares in Lloyds TSB were 12.9 percent lower and Barclays shares dropped 9.2 percent.
RESCUE REMEDY
It was unclear whether the UK plan would be enough to restore market confidence.
"Barring the announcement of a particularly radical and fast-acting package the market is unlikely to find much short term stimulus from any unilateral plan," said Martin Slaney, head of derivatives at GFT Global Markets, in a research note.
"The markets' loss of confidence is seemingly only going to be resolved with an extensive coordinated G7 response... Currently we are calling the FTSE to open down 100 points."
According to a BBC report, RBS, Lloyds and Barclays estimate they may need 15 billion pounds ($26 billion) each to help them through the crisis, which began in the United States last year when mortgage holders began defaulting on payments.
JP Morgan analysts calculated last week that major British banks had a total capital shortfall of 46 billion pounds, according to the Basel II capital adequacy standard.
However, bank officials were keen to dismiss suggestions they had asked for extra money.
"Contrary to press rumors, Barclays has not requested capital from the government and has no reason to do so," Barclays Chief Executive John Varley said. RBS released a statement saying much the same.
DEFAULT SWAPS TIGHTEN
Barclays' five-year senior credit default swaps were about 55 basis points tighter from Monday's close, at 195 basis points mid-market, although little turnover was seen.
Five-year senior credit default swaps on RBS were quoted about 30 basis points tighter at 270 basis points.
That signals a lower cost of insuring their debt against default although traders said the market was illiquid.
Short-sterling futures jumped as bank shares tumbled and as weaker-than-expected economic data strengthened demands for a Bank of England interest rate cut later this week.
(Additional reporting by Myles Neligan, UK bureau; Writing by Jodie Ginsberg; Editing by Luke Baker and Louise Ireland)
