HBOS shares plummeted 41.5% yesterday to just half the level of Lloyds TSB's rescue takeover bid, and Royal Bank of Scotland was driven down 39%, as the City piled pressure on the government to reveal details of a likely £50bn plan to inject capital into most big UK banks.

HBOS shares plummeted 41.5% yesterday to just half the level of Lloyds TSB's rescue takeover bid, and Royal Bank of Scotland was driven down 39%, as the City piled pressure on the government to reveal details of a likely £50bn plan to inject capital into most big UK banks.

Chancellor Alistair Darling will announce plans to stabilise the strife-torn UK banking sector this morning, before the stock market opens.

Yesterday's wild movements in the shares of Bank of Scotland and Halifax parent HBOS and Royal highlighted the urgency of the situation.

Royal, HBOS, Lloyds TSB, and Barclays have all been cited this week as potential recipients of a government capital injection which is likely to be portrayed as an effort to stabilise the UK financial system as a whole. There was no confirmation last night of the identity of the banks participating in the recapitalisation scheme, as the final details were thrashed out.

One industry observer yesterday highlighted the importance of the government scheme, which amounts to partial nationalisation of the sector, to ensuring that the Lloyds TSB takeover of HBOS goes ahead.

Hammered by a sell-off late in yesterday's session, HBOS shares plunged by 66.8p to 94p. This is half the 188p value of the takeover offer on the table, which comprises 0.833 Lloyds TSB shares for every one in HBOS, signalling the City's extreme scepticism that this deal will proceed on the current terms.

Graham Campbell, director and UK equities manager at investment house Edinburgh Partners, told The Herald yesterday: "Clearly the biggest factor just now is confidence in the financial system ...The last thing the government needs is a run on (a) bank. The more equity prices are driven down, the more these things are likely."

The government's likely presentation of the plan as a holistic one for the UK banking sector would not contradict Royal's statement to the stock market yesterday that "contrary to press speculation, RBS did not make a request to government for capital".

Barclays chief executive John Varley went further, declaring that "contrary to press rumours, Barclays has not requested capital from the government and has no reason to do so".

There was also comment from a source familiar with HBOS's situation that it had "not asked for capital from the government".

Royal, which saw its shares cut yesterday to their lowest level since 1993, was last night valued at less than £15bn. It raised £12bn from shareholders in a rights issue as recently as this summer.

In the space of only two days, Royal has seen its already-hammered stock market worth more than halved. Royal shares tumbled 58.1p to 90p yesterday. As recently as spring of last year, taking into account a stock split, Royal shares were flying high at the equivalent of around 700p.

HBOS was meanwhile valued last night at just £5bn. Shares in HBOS were, as recently as early last year, trading at all-time highs near 1200p. Preference shares last night appeared the most likely instrument by which the government would invest in most of the big UK banks, giving the taxpayer a greater degree of protection than Ordinary shareholders.

Such a mechanism could be cost-effective for the government, which currently faces a reasonably favourable environment in which to issue gilts at relatively low yields. It could also avoid disputes with shareholders about dilution of their equity stakes.

Preference shares with warrants to buy Ordinary shares attached and convertible stock are believed to have been among the possible alternative structures considered as the government negotiated the fine detail with the banks.

The government has also been under pressure in recent days to restore confidence in the financial system by guaranteeing all personal deposits.

It has just raised the level of its deposit guarantee to £50,000. However, the Irish government last week upped the ante by giving an unlimited guarantee and Germany has signalled a political will to follow suit. Denmark has meanwhile given a blanket guarantee. Campbell said: "It certainly puts UK banks in a less advantageous position. It would make a big difference for investors if they (the UK government) stated bank deposits would be protected fully."

The recapitalisation of the big UK banks would seem likely to be portrayed as giving them a sufficient capital cushion given the growing expectation that the impending UK recession will be deeper and more prolonged than thought previously.

However, liquidity is viewed by the likes of former Royal Bank of Scotland chairman Sir George Mathewson as a greater problem than capital.

In this regard, the government's recapitalisation plan will be a success only if it restores banks' confidence in lending to each other.

Interbank lending markets have been fraught for more than a year now, but there was a dramatic turn for the worse again in the wake of the collapse of US investment bank Lehman Brothers last month. The seizing up of wholesale money markets in the wake of Lehman's failure was a key factor in the rush to tie up a deal between HBOS and Lloyds TSB, with the government waiving the usual competition rules to get it done quickly.

Even before the government unveiled its recapitalisation plan, there were warnings from some quarters last night that it would not be enough.

Jonathan Loynes, chief European economist at consultancy Capital Economics, said: "The government's reported plans to inject additional capital into some of the UK's largest banks are unlikely to prevent a major slowdown in the growth of bank lending to households and companies from contributing to a deep and prolonged recession in the UK economy."

He added: "It now seems almost certain that the UK government will announce plans to inject up to £50bn of capital into some of the UK's largest banks...The aim would be to repair the damage to capital ratios caused by the losses and write-downs associated with the credit crisis and downturn in the property market.

"None the less, there are reasons why the plan is unlikely to have a major effect on the economic outlook. For a start, a £50bn injection may not actually be enough to restore banks' capital ratios to previous levels. We previously calculated that banks would need to raise in excess of £60bn to continue to expand their lending at recent rates. But the likelihood of heavier future write-downs than we previously assumed suggests that this figure is probably an underestimate."

Loynes also cited banks' possible wish to maintain higher capital ratios than in the past and the likelihood that, in any case, "the demand for borrowing from both households and companies will be significantly weaker in light of the deterioration in economic conditions".

Lloyds TSB shares yesterday fell 33.5p, or 13%, to 225.5p, with Barclays off 29p, or 9%, at 285p.