Brown told he has lost markets' confidence

With shares in Barclays and Lloyds taking a hammering, the Bank of England's new deputy governor refused to rule out wholesale nationalisation of the banks.

When asked about the prospect, Paul Tucker told MPs the "precise instruments" for countering the financial crisis were less important than the need to unblock credit.

The Prime Minister echoed Mr Tucker's stance, claiming that kick-starting lending was the top priority, "whatever the status of the banks".

But David Cameron was scathing, declaring that the nation was "facing dark days indeed" with soaring unemployment, a six-year low in new mortgages and £15billion more borrowing last month. With sterling down another cent against the dollar, the Tory leader said this week's fresh bank rescue package had gone down badly with voters and the Stock Exchange.

He said "market and public reaction to the latest set of government initiatives suggests there is no real confidence that government policies are working".

He added: "The British people are losing confidence in the Prime Minister and...without confidence we won't get a recovery."

Sterling today hit fresh seven-year lows against the dollar, Barclays shares fell 21per cent and Lloyds Banking Group, created by the merger of HBOS and Lloyds TSB, fell 14 per cent.

The falls fuelled expectations in the City that the Government will have to wholly nationalise Royal Bank of Scotland and the Lloyds megabank. Taxpayers are due to take a 70 per cent stake in RBS and have just under half of Lloyds.

Liberal Democrat leader Nick Clegg called for the "temporary nationalisation of our weakest banks without further delay". John McFall, a senior confidant of Mr Brown and chairman of the Treasury select committee, said RBS and Lloyds had to be taken into public ownership to get lending going for business. "Let's get it over with -nationalise the pair of them," he said.

Mr Tucker admitted the Treasury's latest rescue package was "not absolutely guaranteed to succeed", saying it needed similar moves by other countries.

He also issued a warning on debt, saying: "It is vital that at each stage the Government makes credible commitments to get public finances back on a sustainable footing."