The reports said Darling was looking at measures which could cap interest rates on loans to small firms, while a leading Labour lawmaker accused the banks of "sitting on their hands."

Darling will deliver his prebudget report on Monday, which will include a package of measures to stimulate Britain's stalling economy.

The Daily Telegraph and Daily Mail newspapers reported Darling is expected to introduce a new scheme to underwrite small business loans, but if banks fail to loosen their lending policy he would legislate to make them do so.

John McFall, head of parliament's influential Treasury select committee, said major banks must start lending to small business or face increased public pressure for nationalisation.

There is growing anger at the apparent reluctance of banks to pass on cuts in interest rates to mortgage holders or free up credit to small businesses, particularly after several participated in the government's £37 billion bailout scheme.

"Despite having been pulled back from the brink, the banks appear reluctant to launch their sizeable recapitalisation lifeboat and start lending again to households and businesses," McFall said.

"It would seem that they are instead navel gazing and looking warily at each other instead of concentrating on their customers, many of whom are still in peril on a sea of uncertainty."

McFall said that if the banks fail to comply, there could be "nuclear option" of full-scale nationalisation.