THE Government and Bank of England plan co-ordinated action to boost lending to households and businesses by providing funds to the banking sector at below-market interest rates, it emerged last night.

This major policy initiative, in which funding provision will be linked to banks' performance in sustaining or expanding lending amid "heightened uncertainty", was revealed by Chancellor George Osborne and Bank of England Governor Sir Mervyn King in speeches to the City of London at Mansion House. Sir Mervyn said it could be in place "within a few weeks".

Mr Osborne meanwhile signalled the Government was edging itself towards a Plan B by announcing a forthcoming boost to investment in Britain's infrastructure.

He also warned the eurozone woes could "still get worse before they get better" and again indicated if the UK did not get the "right safeguards" it needed to protect its interests as the eurozone integrated further, then voters might be given a say in a future referendum on EU membership.

Mr Osborne insisted the Government was "not powerless in the face of the eurozone debt storm" and that, through increased lending to individuals and businesses, was "rolling up our sleeves and doing everything possible to protect British families and firms".

Sir Mervyn said: "Today's exceptional circumstances create a case for a temporary bank funding scheme to bridge to calmer times. Such a scheme could prevent an aggregate deleveraging of the banking system that might hold back recovery."

Noting the "black cloud of uncertainty has created extreme private sector risk aversion", Sir Mervyn declared there "may be a case for a scheme to underwrite risks which the market itself is unwilling to take".

He added: "What I can say tonight is that the Bank and the Treasury are working together on a 'funding for lending' scheme that would provide funding to banks for an extended period of several years, at rates below current market rates and linked to the performance of banks in sustaining or expanding their lending to the UK non-financial sector during the present period of heightened uncertainty.

"The Bank would lend, as in its existing facilities, against a much greater value of collateral comprising loans to the real economy to protect taxpayers. But the long-term nature of the lending and its pricing mean the Bank could conduct such an operation only with the approval of the Government, as offered by the Chancellor earlier. So such a scheme would be a joint effort between Bank and Treasury."

Mr Osborne noted credit was not the only area where the Coalition could use confidence in the nation's balance sheet to boost private sector growth.

He said: "We are already taking action to support new house-building and infrastructure through government guarantees. In the next month, we will set out how we can do much more."

He did not give specific details but noted how the Government would attract UK pension funds and foreign sovereign funds to invest in the "overhaul of our country's infrastructure".

Labour and the SNP have for months been calling on the Coalition to boost growth and jobs by investing more now in shovel-ready projects.

Mr Osborne again spoke of the eurozone integrating further or facing collapse and said, while the solution might not be a "full-blown United States of the Eurozone", it would need to include policies like stronger economies supporting weaker ones, sharing debt, a "shared backstop" for the banking system and closer oversight of fiscal policy. He reiterated it "may take a Greek exit to make it happen", stressing if this did happen, the eurozone would need a "very good plan in place to prevent contagion".

Mulling the eurozone, Sir Mervyn said an "honest recognition" of losses would require a "major recapitalisation of the European banking system".

The speeches coincided with the Government's White Paper on banking reform, which seeks to protect savers by splitting retail from investment banks.

Ministers estimate the proposals will cost the banking industry up to £7 billion a year and the wider economy as much as £1.4bn a year.