The fall on the FTSE 100, which ended down 5.18% at 4,366.69 points, also came despite co-ordinated interest rate cuts from the Bank of England, European Central Bank and Federal Reserve.

The key points of the plan are:

Banks will have to increase their capital by at least £25bn and can borrow from the government to do so.

An additional £25bn in extra capital will be available in exchange for preference shares.

£100bn will be available in short-term loans from the Bank of England, on top of an existing loan facility worth £100bn.

Up to £250bn in loan guarantees will be available at commercial rates to encourage banks to lend to each other.

To participate in the scheme banks will have to sign up to an FSA agreement on executive pay and dividends.

Falling Shares

BBC business editor Robert Peston said that it was understandable that shares had fallen following news of the government's package.

"What Gordon Brown and central banks have done today should stave off economic Armageddon - but it's probably too late to save us from months, or even years, of sluggish growth."

He said that HBOS shares had risen strongly because it would be more likely to benefit from the plan than its peers.

Preference shares pay a fixed rate of interest instead of a dividend, which has to be paid before other shareholders receive anything, but they do not carry voting rights.

Taxpayers may even end up making a profit from the shares, but that is by no means guaranteed.

Robert Peston said there would be strings attached for banks that take the government money.

"Taking taxpayers' money will not be a licence to trade as normal," he said.

Negotiations will take place with each participating institution that will require them to extend normal credit lines to homeowners and small businesses, in addition to rules on executive pay and dividends to other shareholders.