Potential plans to use taxpayers' cash to shore up a creaking UK banking system drew a mixed reaction in the City today.

Potential plans to use taxpayers' cash to shore up a creaking UK banking system drew a mixed reaction in the City today.

The Treasury is reportedly considering the use of public money to prop up a host of UK banks in return for large stakes - in what amounts to a partial nationalisation of the entire banking sector.

After an unprecedented week of nationalisations and bailouts across Europe, the prospect of such a drastic step did little to restore confidence in the banking sector and is likely to put more pressure on public finances.

Barclays, Royal Bank of Scotland, HBOS and Lloyds TSB all posted double-digit losses, while HSBC - seen as the best capitalised bank - was 6% down.

Numis Securities analyst Gurjit Kambo said the move could be a "double-edged sword", as the prospect of increased security for banks was offset by the threat of dilution for existing shareholders.

Oriel Securities analyst Mike Trippitt added: "It can be taken one of two ways.

"Does this mean the Government is very worried about the state of banks' balance sheets - which means it is a massive negative... or does it mean that the Government realises that to really stimulate loan growth the banks have to have more capital?"

Mr Kambo said: "The rating of the banks would improve, and the risk to shareholders would reduce because they are getting backing from the Government.

"But there could be a dilution for larger institutional investors, so it is a double-edged sword. It is not so straightforward.

Reports the Treasury could set up a voluntary recapitalisation scheme are also problematic, because those using it would reveal their weakness.

In August 2007, Barclays had to move to quash speculation over funding problems swiftly when it used the Bank of England's emergency standing facility after a "technical breakdown" in the UK clearing system caused a shortfall for one day.

Use of the Bank's emergency facility is confidential, but Barclays acted after the move leaked out into the marketplace. The share registers of listed banks are, however, very much public documents and having the Government on the share register could mark the bank out.

"If you do it then it does signal that you have got capital problems and you need to shore up your balance sheet," Mr Kambo added.

But he also acknowledges the other side of the coin - lenders could see reduced risk in dealing with a bank which has a major public shareholder, which could get frozen inter-bank lending markets back up and running again.

Mr Trippitt added that public support could speed up the painful process of de-risking and deliver a quicker cure for the banking system because - despite huge fund raising and rights issues - banks are struggling to raise sufficient cash quickly enough.

"We have got into this mess because there has been a huge degree of leverage relative to the capital bases of these banks.

"If we want banks to recover from the credit crisis and move into a phase of lending...then you could argue that some Government capitalisation is probably required to be able to do that."

Any move to shore up the balance sheet of banks with public funds could have a devastating effect on public finances already crippled by falling tax receipts as the economy plunges towards recession.

Investec economist David Page said an injection of £70 billion - a fraction of the 700 billion US dollar (£398bn) rescue package agreed on Friday - would leave Government forecasts of £43 billion net borrowing during the current financial year in shreds.

Mr Page, who predicted this figure would hit £70 billion even before the current crisis, said: "Clearly this would double the public deficit we are likely to see this year.

"We are looking at a different paradigm. There is no idea of what scale of bailout is involved."