Mortgage lender Northern Rock has taken the "unusual" step of calling on the Bank of England to provide emergency funding in the latest sign that the credit crunch is squeezing the UK banking sector.
In a dramatic move, the Bank will give short-term credit to Northern Rock to allow it to carry on operating, according to reports last night.
Northern Rock has turned to the Bank of England as the "lender of last resort" after difficulties raising cash from the commercial markets.
The decision was apparently taken after consultation with the Treasury and the Financial Services Authority.
There has been widespread volatility on international markets over fears that banks may have to write off massive quantities of bad debt held in US mortgages.
Customers were being urged to keep calm last night, 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 chairman of the Parliamentary financial watchdog John McFall said: "I don't think customers of Northern Rock should be worried about their current accounts or mortgages.
"The fact that the Bank is willing to act as lender of last resort should be reassuring, because it means they think the problems are temporary."
It was revealed last night that banks drained a £4.4 billion relief fund offered by the Bank of England in less than an hour.
The release of additional funds helped ease three-month inter-bank rates to 6.88 per cent and overnight dropped back to 5.87 per cent.
BoE governor Mervyn King warned on Wednesday in a letter to MPs on the Treasury Select Committee that banks may have under-estimated their demand for reserves.
He added the BoE was not prepared to bail out banks, cautioning that providing short-term liquidity to markets in trouble "encourages
excessive risk-taking and sows the seeds of a future financial crisis".
That was backed up by Chancellor Alistair Darling who urged banks to adopt a more cautious approach to lending, signalling Treasury concern over the impact of years of easy credit.
Meanwhile Halifax, Britain's biggest mortgage lender, said it would raise the cost of some of its mortgage rates from this morning.
The move crushed any lingering hopes that the Bank of England's no-change interest rate policy could shield homebuyers from the worldwide credit crunch. The blow to home owners came as banks scrambled for extra money made available by the Bank of England.
Increases of between 0.1 per cent and 0.2 per cent, depending on the size of the loan, on a range of Halifax tracker mortgages will apply only to new borrowers.
They follow a similar move on Wednesday by Abbey, the second biggest mortgage lender, and Standard Chartered.
Standard Life Bank is expected to announce higher rates for its discounted and tracker home loans today.