A multibillion-pound bailout which could leave taxpayers with major stakes in two Scottish banks was being thrashed out last night.
Prime Minister Gordon Brown insisted there was “a collective spirit” among European leaders to solve the global financial crisis.
And First Minister Alex Salmond called for a £1billion package to stop Scotland sliding into recession.
Treasury officials and bank executives were working on the details of the bailout.
Royal Bank of Scotland and HBOS are expected to lead the way with proposals involving the issue of ordinary shares, underwritten by the UK Government.
Existing investors will be able to buy the new shares, but any not taken up will result in the government holding substantial shareholdings in both firms.
It is thought RBS wants the government to underwrite a £15billion cash call to investors, while mortgage lender HBOS is requesting up to £10billion.
The proposals come less than a week after the government unveiled a £400billion package to recapitalise the banks and get them lending to each other again.
The talks were accelerated after heavy falls on world markets last week, including a 61% drop in the value of RBS to less than £12billion.
It is thought banking shares could be suspended today while traders digest details of the announcement.
The original government plan involved taking preference shares in banks which would pay a dividend and rank above ordinary shareholders in any break-up.
However, the proposals would now also see ordinary shares offered to investors, ensuring the banks get the cash they want. Any shares taken by the government will be placed in a newly-created bank reconstruction fund which would hold the stock until conditions improve.
Speaking after a Paris summit of “eurozone” leaders, the prime minister said there was a determination to work together to prop up markets, kick-start new lending for mortgages and businesses and revitalise the international financial system.
“This is an important moment for the world economy,” said Mr Brown.
“The decisions we make in the next few days are decisions that will affect us for many years ahead.
“The eyes of the world are looking to their governments to help restore confidence in markets. The most precious asset we have lost is confidence, something that we will restore through co-ordinated intervention.”
“I am confident after talking to my European colleagues that more liquidity, funding for the medium-term loans necessary for businesses and mortgages and the recapitalisation of banks are part of their thinking as well. I believe that the action we have taken in Britain will restore confidence, and we will see over the next few days worldwide action that will also see confidence restored.”
The government’s assistance will be in return for pledges from banks that they curb executive pay and resume lending to individuals and small businesses. It may also insist on boardroom representation.
Bank of England governor Mervyn King is believed to have told the banks to ask for more cash than they need so their capital position is strengthened to absorb shocks and a long recession.
The bailout could lead to Lloyds TSB renegotiating its takeover of HBOS, although both banks insisted last night that they remain committed to the deal going ahead – despite fresh rumours that it had collapsed.
RBS chief executive Sir Fred Goodwin is expected to confirm plans to step down.
His position and that of chairman Sir Tom McKillop have been under scrutiny since it was forced to raise £12billion from investors earlier this year.
RBS has written off nearly £6billion from credit crunch-linked investments this year.
Government efforts to bail out banks has so far failed to thaw frozen money markets. As shares plunged on Friday, overnight lending rates between banks jumped 0.4% to 5.81% – more than 1% above the Bank of England’s official 4.5% base rate.
Three-month lending rates – key to pricing mortgages – also rose again to 6.285%, nearly 2% above base rate.