The Bank of England made a fresh move to try to boost the liquidity of banks and signalled that policymakers are increasingly concerned about the problems affecting the sector.

The central bank said it would allow banks to use some highly-rated corporate and consumer loans for the first time as collateral in the weekly cash injections that it has been providing.

These have been a vital source of funding at a time when banks have been reluctant to lend to each other. This reflects widespread concerns about the risks of further collapses in a sector that has been rocked by the demise of a succession of giant firms.

Cash-strapped banks wanting to borrow money using the auction facility have previously only been allowed to use residential mortgage-backed securities.

The Bank will now accept securities backed by a range of consumer and corporate debt, including some student loans, consumer loans - such as credit card debt - and vehicle loans. Borrowers will have to pay an extra 0.5% interest to use the facility.

However, Mervyn King, the Bank's Governor, made it clear he thought the Bank had taken a significant step.

"In these extraordinary market conditions, the Bank of England will take all actions necessary to ensure that the banking system has access to sufficient liquidity," he said.

"It's the comment from King that makes the difference," said Brian Hilliard, chief UK economist at Societe Generale. "The main message is that, unlike a year ago, the Bank is not going to drag its feet."

The Bank will also offer a further £40bn in next week's funding facility to ease the logjam in interbank lending. The Bank usually offers three-month money on a monthly basis, but from this Monday it began holding auctions every week for the first time.

It will continue with the weekly money auctions until at least November 18, although the amount of funds available will be determined "in the light of the degree to which current marketconditions persist".

Banks also have access to the Special Liquidity Scheme, launched in April to allow them to swap mortgage-backed bonds for attractive government bonds. The scheme was due to close this month, but was recently extended until January 30 to encourage banks to lend to each other.

The latest initiative helped banking stocks gain ground on a day when the sector was boosted by news that America's Wells Fargo had agreed to acquire its giant rival Wachovia in a $15bn all-share deal without requiring any help from the US Government.

Citigroup had previously agreed a $2bn deal with Wachovia that depended on government guarantees.

Confirmation by the Financial Services Authority that the compensation limit for bank deposits would be raised to £50,000 per customer from £35,000, from October 7, also buoyed sentiment.

Shares in HBOS rose for a third day running and closed up 18%, or 30.4p, at 200.5p. Lloyds TSB rose 10.8%, or 28.25p, to 290.25p. As Lloyds TSB has offered 0.833 shares for each one in HBOS, the controversial recommended bid valued each HBOS share at 241.7p yesterday.

Consequently HBOS shares traded at a 17% discount to the price implied by the offer. On Tuesday the discount stood at 35%, which some sector watchers said suggested Lloyds TSB might try to renegotiate its offer.

Some leading investors have thrown their weight behind the deal in recent days.

The Council of Economic Advisers to the Scottish Government said it supported official efforts to maxi-mise the benefit of what it described as the proposed Lloyds TSB/HBOS "merger" and to minimise any potential negative impacts on Scotland. The council is chaired by Sir George Mathewson, former chairman and chief executive of Royal Bank of Scotland.