The Bank of England is concerned that the UK's banking system is heading for a third wave of crisis that could snuff out fragile signs of recovery in the economy.

On Thursday the Bank surprised the City by announcing that it would pump an extra £50bn of new money into the economy despite recent stockmarket rallies.

Now the Guardian has learned that this increase in quantitative easing was driven by fears in Threadneedle Street that the credit crunch is still sucking the life out of the British economy and the banking sector remains in deep trouble.

The new mood of caution chimes with comments from business leaders yesterday, who warned that apparent green shoots in the economy had shallow roots.

Richard Lambert, director general of the CBI, said: "The fact is that for all the injections of taxpayers' money, the credit markets are still not working properly."

Bank of England officials are concerned that big banks now supported by the taxpayer, such as Royal Bank of Scotland and Lloyds Banking Group, are struggling to increase lending volumes, as they had promised in return for help from the government.

The governor, Mervyn King, and several other members of the Bank of England's monetary policy committee are said to be unconvinced by talk of green shoots that has helped propel the FTSE 100 share index up by more than 20% over the last month.

Fears of a false dawn echo the mood at the beginning of the year, when apparent recovery in financial markets was wiped out by a second wave of crisis led by RBS and Lloyds.

This week both banks again warned of sharp increases in bad loans to British business customers. RBS said yesterday it was seeing little sign of green shoots.

Continued weakness at these banks may prevent the increase in lending that ministers are desperate to see, and dash hopes of a pre-election recovery for Labour.

The Bank of England is also worried that continued stresses in the global financial system will suck money out of the UK as cash-starved international banks bring money back home. Foreign banks are thought to be withdrawing funds from Britain once loans expire, rather than roll them over.

In return for support from the government, both RBS and Lloyds had pledged to increase lending to homeowners and businesses to compensate for declining foreign lending. Instead Stephen Hester, chief executive of RBS, said yesterday that demands for loans had contracted as customers "quite properly" try to reduce their borrowings as the recession bites.

King presents the MPC's latest quarterly inflation report next Wednesday and speculation was rife in the Square Mile last night that the report would contain gloomy forecasts for economic growth and inflation, which will probably be projected as being below its 2% target in two years' time, even though it is currently at 2.9%.

Last year King was criticised by some experts for failing to cut interest rates fast enough as the economy slid into recession. But from September, when US investment bank Lehman Brothers collapsed, he led the MPC in slashing rates to an all-time low of just 0.5% and embarked on the unconventional quantitative easing in March, a policy the European Central Bank said on Thursday said it would follow.

Poor lending decisions by HBOS, now part of Lloyds, and RBS, along with the rapid deterioration in the economy, mean that the two banks in which the government has major stakes could alone account for £25bn of bad debts by the end of the year.

Both banks believe these losses will count towards the "first loss" they must bear before their insurance – through the government's asset protection scheme – kicks in.

The extent of the rise in bad debts has surprised some commentators who now believe the taxpayer could be on the hook for losses under the asset protection scheme faster than first expected.

There has been some evidence of a small increase in mortgage lending in Britain, but it is not nearly strong enough to prevent house prices, which are down nearly a quarter from their 2007 peak, falling further. And unemployment is expected to continue rising well into next year, something that is likely to restrain consumer spending.

Many economists have been encouraged by some better figures on consumer confidence and forward-looking surveys into thinking that the 1.9% contraction in the economy in the first quarter of the year – the worst for three decades – will not be as severe in the second quarter. But they say that this only marks a slower pace of contraction, not a rapid return to growth.

Few share the chancellor's belief that the economy will recover strongly in 2009, and nor does the Bank of England.