The Bank of England has announced a £50 billion sterling package to free up Britain's mortgage market in one of the biggest moves by a central bank to combat the global credit crunch.

But BoE Governor Mervyn King said banks using the scheme, backed by the British government, were not being 'bailed out' by the British taxpayer.

In a bid to help kickstart the banking system, the BoE is allowing other lenders to swap their mortgage debts for more reliable government bonds, paying a fee in return. The swap would take place over one to three years.

Mr King said the arrangement was necessary to improve liquidity, restore confidence in financial markets and 'protect the rest of the economy' from the credit freeze.

He said banks would pay for the privilege and were going through a period of 'painful adjustment' after excessive lending in the past. Under the deal, companies taking part in the swap will have to provide assets of 'significantly greater' value than the Treasury bills they receive to avoid the UK taxpayer taking on the risk of potential losses.

Britain's main mortgage providers are tightening their lending criteria amid mounting fears over the sector's exposure to the collapsed US sub-prime housing market and a subsequent global squeeze on credit.

In recent months, a growing number of banks have increased the interest rates they charge to their customers for home loans, contributing to a sharp slowdown in British house prices.

Many global banks have suffered heavy losses related to mortgage-backed securities that were effectively bets on high-risk US borrowers repaying their mortgage loans.

Meanwhile, the EU's top financial market regulator, Charlie McCreevy, said the Bank of England's plan to stabilise the British mortgage market was a matter entirely for the bank.

'That is a matter in the total competence of the Bank of England,' the EU's internal market commissioner said. Mr McCreevy has sweeping powers to intervene if he believes the internal capital market is distorted by any action by an EU state.

A spokesman for the European Commission said it was studying the BoE plan, but added that it was too early to say whether the move would constitute state aid.

'We are in touch with the UK authorities concerning this scheme and it is far too early to start speculating about whether it is state aid or not,' said Jonathan Todd, spokesman for the EU's top competition regulator.