LONDON - The British government moved Tuesday to break up the country's two biggest retail banks, imposing a major shakeup on the financial sector as it exacts payback for last year's massive state bailout at the height of the financial crisis.

The government also injected billions of pounds more of taxpayer funds into Royal Bank of Scotland PLC and Lloyds Group PLC, underscoring worries the banking sector is not out of trouble yet.

The change effectively pump almost 40 billion pounds ($65 billion) more into the two banks and could result in the creation of as many as three new commercial banks.

The move to make the banks sell off some of their businesses approach comes at the insistence of European regulators to ensure competition in the banking industry after the government's initial 37 billion pound rescue package last October.

The British government also extracted promises from RBS and Lloyds for new restrictions on bonuses to align pay with long-term performance, reflecting demands from disgruntled taxpayers that the previous culture of big payouts based on short-term gains - and excessive risk taking - not be allowed to continue.

"These changes are better for the taxpayer, better for the banks, and better for the economy," Treasury chief Alastair Darling told lawmakers. "They will mean stronger and safer banks better able to support the recovery."

But the reform plan raised eyebrows by more than doubling the funds that the government has invested in the British banking system, one of those hit hardest by the global credit squeeze. The RBS bailout now exceeds the $45 billion given by the U.S. government to each of Citibank and Bank of America.

The plans to reduce the size of the banks come amid an international debate about whether large banks should be broken up to prevent so-called "too big to fail" syndrome.

The government has already announced it will split Northern Rock PLC, the victim of Britain's first bank in more than a century, into two but it has rejected suggestions by the Bank of England that banks' retail functions be hived off from their more speculative ventures.

In the United States, the Obama administration has also shied away from suggestions that all large lenders be broken up for safety, maintaining that strong, large banks play an important role in the economy.

The government will buy 25.5 billion pounds of "B" shares in RBS to strengthen its capital, taking its current 70 percent stake closer to full nationalization at 84 percent.