Chancellor George Osborne has said the launch of an £80 billion emergency scheme to kick start bank lending shows Britain is "not powerless to act" in the face of the eurozone crisis.
The Bank of England and Treasury unveiled their "funding for lending" programme in an attempt to ward off a tightening credit squeeze and help drag Britain out of its double dip recession.
The Bank painted a grim picture for households and businesses as it warned that credit availability was falling and borrowing costs rising as the eurozone woes take their toll on the banking sector.
But the funding for lending scheme aims to free up the log jam in credit hitting the economy, by offering banks cheap finance on the condition they pass it on to borrowers.
Mr Osborne said: "Today's announcement aims to make mortgages and loans cheaper and more easily available, providing welcome support to businesses that want to expand and families aspiring to own their home.
He added the initiative would "inject new confidence into our financial system and support the flow of credit to where it is needed in the real economy - showing that we are not powerless to act in the face of the eurozone debt storm".
Under the scheme, British banks are being offered funding at low interest rates over a four-year period - but it will be directly linked to bank lending performance to encourage lenders to increase loan availability and reduce rates.
For every £1 of additional lending made by a bank, it will be able to access an extra £1 of cheap funding from the scheme. Those that reduce lending will have to pay higher fees to use the scheme. Bank of England governor Sir Mervyn King said the scheme created "strong incentives" for banks to increase lending.
Banks will be able to access finance at rates from around 0.75% including fees - far cheaper than the equivalent 1.25% to 2.5% rate in finance markets. They will be able to borrow up to 5% of their existing lending stock, which will be increased if they expand net lending over the next 18 months.
The CBI said the scheme should provide a "real incentive" for banks and building societies to increase their lending to businesses and individuals, if possible at lower rates of interest. Director-general John Cridland said: "It is a positive step towards stabilising funding for lending, particularly given the current market turmoil driven by the eurozone crisis. I hope this may enable mortgages to be available at a lower rate of interest."