By Sumeet Desai and Frank Prenesti
LONDON (Reuters) - Britain's finance minister Alistair Darling will announce a rescue package for the banking system on Wednesday, a move likely to include a major injection of capital into banks, a government source said.
The decision follows days of crippling pressure on high street banks, some of which have lost nearly half their value on the stock market amid investor fears they could collapse if they are not handed a multi-billion-pound liquidity lifeline.
Darling is due to make an announcement at around 0600 GMT, before the markets open. The European Commission, which must approve state support programs, said it had been informed of the plan and would make a decision quickly once it had details.
British media have suggested the package could involve a stand-by facility that would effectively allow banks to tap as much money as they need, but the source, while confirming the package would be large, downplayed those suggestions.
"There will be an element of recapitalization for the banks," he said, but added: "A lot of the speculation that's out there at the moment is wide of the mark."
One possibility mooted by financial analysts would be for the government to take stakes in struggling banks and in return receive preference shares, which would allow the taxpayer potentially to benefit should the banks turn around.
Darling and British Prime Minister Gordon Brown met the heads of the Bank of England and Financial Services Authority (FSA) 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 following that meeting.
As well as the statement in the morning, Darling said he would later address parliament on the plan.
Governments around the globe, from Iceland to South Korea, are fighting to unfreeze lending and borrowing brought to a halt by fears of hidden losses in financial institutions.
Pressure mounted on the British government to take swift action after shares in its major banks plunged on Monday and Tuesday. That followed reports that one of the options being considered by Britain was a massive injection of capital into the banks, which could dilute current investors' holdings.
HBOS shares lost more than 40 percent on Tuesday and Royal Bank of Scotland dropped 39 percent.
It was unclear whether Britain's rescue plan, which follows the U.S. decision to provide more than $700 billion in a bailout of banks and financial institutions, would be enough to restore market confidence following days of near panic.
"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.
(Writing by Luke Baker; Editing by Giles Elgood)
