The UK's fifth-largest mortgage lender has asked the Bank of England to provide emergency funding in the starkest sign yet that the global squeeze on credit is hitting the UK banking sector, it was reported last night.

In an unprecedented move, the Bank is expected to step in today to prop up Northern Rock by providing it with a short-term credit line.

Last night customers were being urged to keep calm while analysts suggested it could be a result of a short-term cash flow problem sparked by the drying-up of the money market.

The bail-out, which has been approved by the Chancellor of the Exchequer and follows consultation with the Financial Services Authority, is the first real sign of world credit turmoil.

Investors have been wary of lending to banks following the crisis in sub-prime loan defaulters in the US.

According to reports, Northern Rock has applied to the Bank of England as the "lender of last resort", for short-term credit, and the decision is expected to have repercussions across the financial markets today.

Yesterday shares in Northern Rock dropped 5% before the decision to apply to the Bank was made public.

The lender is the first to be propped up since the Bank in 1998 revised rules under which it will act as a lender of last resort to banks hitting financial difficulty.

Uncertainty has hung over the Newcastle-based lender in recent weeks because it could not access the wholesale funding upon which it is heavily dependent.

Banks, such as Northern Rock, have been worst hit by the "drying up" of money markets as, unlike building societies, they do not have a large number of savers to turn to for cash. The bank, which has assets of £113bn, draws a smaller proportion of its cash for lending - around £24bn - from ordinary depositors.

Ray Boulger, senior technical manager at mortgage broker John Charcol, said: "It is unusual. Banks will try to arrange things so they do not go to the lender of last resort."

And he added: "Clearly Northern Rock has had difficulties raising money from their usual sources."

Justin Urquhart Stewart of Seven Investment Management, said: "It is a short-term cash-flow problem. It is unusual for for them to be in this position.

"This is the Bank of England saying we support the banking system but do not take this as an indication of us propping up investment banks."

John McFall, Treasury Select Committee chairman, said: "I don't think customers of Northern Rock should be worried about their current accounts or mortgages.

"The fact the Bank is willing to act as lender of last resort should be reassuring, because it means they think the problems are temporary."

A relief fund of £4.4bn from the Bank of England was drained by banks yesterday in one hour as the Bank aimed to ease overnight inter-bank lending rates which have soared to 6.9%.

Mervyn King, governor of the Bank of England, said the Bank was not prepared to bail out banks, warning that providing short-term liquidity to markets in trouble "encourages excessive risk-taking and sows the seeds of a future financial crisis".

Liberal Democrat Treasury spokesman Vince Cable, said: "This is a serious development and it was entirely predictable since Northern Rock is one of those banks which has been aggressively increasing its market share by offering mortgages at multiples of income well in excess of prudent levels."

Neither the Bank of England nor the Treasury was prepared to comment on the issue last night.

A spokesman for Northern Rock was quoted in one paper as saying: "The next scheduled announcement is on October 1. The company is aware of its obligations. If it needs to make an announcement in the meantime it will do so."

Meanwhile, the UK's biggest mortgage lender said yesterday it was raising its mortgage rates as banks continue to respond to volatility in the global credit markets.

Halifax, which accounts for one in every five mortgages in the UK, is increasing the rate charged on 20 of its tracker mortgages for new customers by between 0.1% and 0.2% from today. The move - which the lender says makes around £5 a difference per month to payments - came the day after Abbey, the second-biggest lender in Britain, announced it is increasing its tracker mortgage rates by the same amount for new customers.