A state-owned 'bad bank' to buy up tens of billions of pounds of toxic assets from high street banks could be established under plans being drawn up by the Treasury.

Gordon Brown is preparing a multi-billion-pound rescue package for the banks that is expected to be announced next week.

The Prime Minister said yesterday that action on toxic debts, which have been blamed for the failure of high street banks to resume normal lending, was essential.

Ministers will spend this weekend in talks with bank executives, who are thought to be resistant to the “bad bank” proposal. However, Mr Brown has been warned by City experts that the scheme may have to be introduced quickly to prevent the financial crisis worsening.

Daily Telegraph