By Sumeet Desai and Frank Prenesti
LONDON (Reuters) - Finance minister Alistair Darling will announce a rescue package for the British banking system on Wednesday and a government source said it was likely to include an injection of public money.
However, the source played down media speculation that the plan, intended to help banks deal with the effects of a global financial crisis, would include a stand-by facility to ensure that no banks ran out of cash.
"There will be an element of recapitalization for the banks," the source said, adding: "A lot of the speculation that's out there at the moment is wide of the mark."
Details are expected to be completed overnight and an announcement made at about 7 a.m. (0600 GMT).
The European Union, which must approve members' state support programs, said it was aware of the package and would make a decision on it once it had seen details.
"Once we have been formally notified, we will analyze the plan to see if it is compatible with EU state aid rules. We hope to make a decision quickly," the European Commission said.
Darling and British Prime Minister Gordon Brown met the heads of the Bank of England and the Financial Services Authority (FSA) late on Tuesday 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 after the meeting.
Governments throughout the world are fighting to unfreeze lending and borrowing brought to a halt by fears of hidden losses. In the latest in 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.
INJECTION OF CAPITAL
Pressure mounted on the British government to take swift action after bank shares plunged on Monday and Tuesday. This followed reports that one of the options being considered 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 new capital would take the pressure off existing debt.
HBOS was the biggest British sector loser on Tuesday, finishing 41.5 percent lower. Royal Bank of Scotland (RBS) ended down 39.2 percent.
It was unclear whether the rescue 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.
According to a BBC report, RBS, Lloyds and Barclays estimated they might 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.
(Additional reporting by Myles Neligan, UK bureau; Writing by Jodie Ginsberg; Editing by Luke Baker and Andrew Dobbie
