Video: Brown and Darling announce the bail-out Agencies

The Bank of England today slashed UK interest rates by half a point to 4.5% in its first emergency rate cut since the aftermath of the 9/11 terrorist attacks, just hours after the British government announced a momentous £500bn rescue of Britain's banking sector.

The shock move from the Bank of England came at midday as the world's central banks acted together to cut the cost of borrowing in an attempt to avoid financial meltdown, with rate cuts in America, the eurozone, Canada, Sweden and Switzerland.

Gordon Brown told parliament that the global rate cuts were an important signal that the world can act together to address the financial crisis. Just hours earlier, the prime minister had taken the momentous decision to part-nationalise Britain's banks.

The Bank of England said that it was acting because the outlook for economic activity in the United Kingdom has "deteriorated substantially, reflecting a sharp monetary contraction". It had been due to announce its decision on rates tomorrow.

Shares in London fluctuated wildly today, with the FTSE 100 index plunging by as much as 360 points, or 7.8%, in early trading before rallying after the rate cuts. But the moves by the government and the Bank of England appeared not to be enough to restore confidence. The FTSE 100 closed down almost 5.2%, dropping 238.5 points, to 4366.7. Trading was just as dizzying on Wall Street, where the Dow Jones Industrial Average was trading 223 points lower at 9223 at 5.30pm.

UK government ministers and bank officials thrashed out the details of the banking rescue plan into the early hours of the morning.

The £500bn rescue scheme comes in three parts:

• £50bn of taxpayers' money will be offered to banks to rebuild their capital reserves

• £200bn of liquidity is being made available as short-term loans in an attempt to thaw the frozen interbank lending markets. This is twice as much as was previouly offered under the Special Liquidity Scheme

• A further £250bn will underwrite lending between banks - another attempt to shore up their balance sheets.

The £50bn part-nationalisation section of the scheme is equivalent to £2,000 for every taxpayer in the UK, and analysts warned today that the public will "foot the bill" for the plan.

The Treasury said that seven banks and one building society will take part - Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland and Standard Chartered.

Barclays and RBS have already said they will participate in the scheme, but HSBC has insisted that it has no plans to do so.

Gordon Brown said that the package was a "bold and far-reaching solution" to the crisis and would help every family and business in the country.

"This is not a time for conventional thinking or outdated dogma but for fresh and innovative intervention that gets to the heart of the problem," he said.

Brown also claimed that taxpayers would be protected and would earn "a proper return".

But Jeremy Batstone-Carr, an analyst at Charles Stanley, said that "ultimately government borrowing will increase and ultimately we, the taxpayer, will foot the bill". He also suggested that £50bn may not be enough to rescue the banking system.

An end to fat-cat pay?

The complex scheme announced this morning suggests that the government has insisted on a crackdown on the pay packages of top banking executives in return for rescuing them.

"In reaching agreement on capital investment the government will need to take into account dividend policies and executive compensation practices and will require a full commitment to support lending to small businesses and homebuyers," said the Treasury.

According to Darling, the plan will "unbung" the banking sector.

"It is a process that inevitably will take time. It is not an instant change but it is a restructuring, it is stabilising the system, and that is very important," the chancellor said.

Asked why the government had not come up with the package earlier, he said that the discussion had been going on for several weeks and had been very complex.

He said he was "rather irritated by the speculation started on Sunday," adding: "I wanted to announce it when the time was right, when we had got everything sorted out, we had a scheme that worked and the big banks were signed up to it."

Liquidity injection

The government will use £50bn to buy preference shares in the banks, which take precedence over ordinary shares during a liquidation, but do not give the holders any voting rights.

The £200bn of lending announced today comes through the Special Liquidity Scheme, which allows banks to get short-term funding from the Bank of England by swapping long-term bonds for short-term UK Treasury Bills.

Separately, the government will provide guarantees to the banking system of up to £250bn to encourage banks to lend to each other and end the paralysis in the interbank lending markets. The Treasury stressed though that it will charge normal commercial fees for these guarantees.

The plan comes after a succession of tumultuous days on the stockmarket. Yesterday Royal Bank of Scotland shares slumped by 39% and HBOS lost 40%. It was reported this morning that the RBS chief executive, Sir Fred Goodwin, and the chairman, Sir Tom McKillop, are stepping down, but there was no official announcement from the bank and sources have denied the story.

RBS and Barclays are thought to need £15bn each in fresh capital, with Lloyds TSB requiring £12bn - assuming its takeover of HBOS goes through.

Shares in HBOS surged by 60% today but fell back to close up 24.5% at 117p. Royal Bank of Scotland was trading 22% in early trade but closed pretty much flat at 90.7p.