Britain has stepped up its action against the euro zone crisis by agreeing to offer billions in cheap loans to UK banks, in co-ordinated action that took markets by surprise.
The government and Bank of England announced the surprise plan late last night in London in a bid to force commercial banks to lend to businesses struggling amid Britain's recession.
The banks are reluctant to lend amid the threat of a Greek exit from the euro zone.
The plan comes in addition to the Bank of England's Quantitative Easing project policy, under which it has injected £325 billion sterling of new money into the British economy since 2009.
Bank of England Governor Mervyn King said in a speech last night to coincide with the announcement of the fresh stimulus measures that the euro zone crisis had "grown to cast a long shadow over" Britain's own economic recovery.
King added that "exceptional circumstances create a case for a temporary bank funding scheme to bridge to calmer times."
Britain, which is a not a member of the single currency bloc, relies on the euro zone for much of its trade.
Finance minister George Osborne, speaking alongside King, said a lack of credit was "damaging businesses and costing jobs."
"The government - with the help of the Bank of England - will not stand on the sidelines and do nothing as the storm gathers," he added.
The euro zone is in turmoil as debt-wracked Greece struggles to remain part of the bloc and amid fears that Spain's government may follow Spanish banks in requesting a huge financial bailout.
Despite possessing a massive public deficit of its own, the British government is enjoying unusually low borrowing costs as investors see its bonds as a safe haven from the euro zone crisis.
King revealed that the Bank of England would activate measures announced in December which it is hoped would provide short-term liquidity of at least £5 billion a month to banks. The first auction under the so-called Extended Collateral Term Repo (ECTR) Facility would take place on Wednesday, the BoE said.
In addition, a "funding for lending" scheme due to begin in a few weeks - and lasting several years - would offer cheap loans to banks in exchange for a wide range of collateral and on the condition that they increased lending to small businesses.
Reports said that about £80 billion would be made available under the "funding for lending" scheme.
Britain escaped a deep downturn in late 2009 but fell back into recession in the final quarter of 2011 on the back of state austerity measures and the euro zone debt crisis. Britain's Conservative-Liberal Democrat coalition administration has slashed public spending and hiked taxes since it won power in 2010, after inheriting a record deficit from the previous Labour government.
