£250bn bill to save US banks

A vast $235billion (£158billion) of taxpayers' money is being risked to save Citigroup while Bank of America, which owns major City employer Merrill Lynch, is getting a $138billion (£92.5billion) handout.

Between them, the pair employ more than 16,000 bankers in London. Despite the huge sums, some analysts still think the two companies will have to be nationalised.

The latest bail-outs add further pressure on incoming president Barack Obama days before he is sworn in as president.

Bank of America took over Merrill Lynch in the frenzied Wall Street week when Lehman Brothers collapsed under a mountain of debt. The deal was done under pressure from the White House.

Today for the first time it admitted that losses of some $15.3billion (£10.3 billion) were lurking in Merrill Lynch, including "toxic" loans and investments that have collapsed in value.

Washington today agreed to pump $20 billion (£13.4 billion) of cash into the group to cover those losses, but also said it would use $118 billion (£79.5 billion) of taxpayers' money to underwrite other "toxic assets".

Meanwhile, Citigroup entered an agreement with the government whereby the taxpayer will share its devastating losses on its duff loans and investments. The bank will shoulder the first $39.5 billion (£26.5billion) with the government shouldering up to $235billion (£158billion).

The news came as the Bank of England today warned that Britain faced its deepest downturn in decades.

Deputy governor Sir John Gieve admitted there was little that could be done to limit the slump in the first half of this year.

He said the main challenge was to prevent a prolonged recession and a sustained period of falling prices, or deflation.

His comments raised hopes the monetary policy committee will cut interest rates again next month having reduced them from five per cent to a 315-year record low of 1.5 per cent since October.

In a speech in Manchester, Sir John said: "2009 is certain to be a difficult year for the UK and the global economy more generally. In the UK, we expect the sharpest fall in output for decades while retail prices are likely to fall for the first time in almost half a century.

"A decade or more of remarkable macro economic stability has come to a shuddering halt." Fourth-quarter GDP figures next week are expected to confirm Britain is officially in recession, as defined by two successive quarters of economic decline. The National Institute for Economic and Social Research, an independent think tank, reckons the economy shrank by 1.5 per cent in the fourth quarter, the worst figure since 1980.