Criteria for 'rescue deal' drawn up

Criteria are being developed for a framework to help decide which areas would most benefit from state assistance, officials confirmed, but there would be no list of named "safe" firms.

Lord Mandelson told The Guardian that British industry was looking for a more activist approach from Labour and its response would be a key test of the party. "They don't want us to pick winners, but they do want a route map," he said.

The peer said it was too early to predict the length and depth of the recession but urged the banks to boost their lending, warning them against "cutting off their noses to spite their faces".

"No one can foretell how short or long, how painful or painless, the recession is going to be," he said.

"All I know is that the deeper we get into the recession, the higher the costs of climbing out will be."

He went on: "The banks have experienced a sharp liquidity crisis. They have lent too much at too cheap a price for too long. But they are now overreacting to that in my opinion in too conservative and restrictive a way.

"They are in danger of substituting one set of problems for another, and in the process doing themselves further damage by underlending and not strengthening their balance sheets and profits in the longer term. They are close to cutting off their noses to spite their faces."

In a wide-ranging interview, he claimed credit for having "stabilised" the party with his shock return to the front bench.

"I have made it possible to calm nerves, cheer colleagues up and make people feel they can sit round the same table again without being Blairite or Brownite. I think others feel a full stop has been put on the end of quite an unhappy chapter."