In a surprise move last night, Germany followed Ireland and Greece in offering blanket protection to depositors if banks failed. The change came just days after Britain extended protection from £35,000 to £50,000 in UK banks.

The issue will be high on the agenda of the first meeting of the new National Economic Council in Whitehall today, amid fears of an exodus of funds from British banks to foreign institutions enjoying state protection.

Both Mr Brown and Business Secretary Peter Mandelson had already voiced concern over the impact of the Irish move, and it is understood that German chancellor Angela Merkel gave no indication of her intention to follow suit when she met fellow EU leaders in Paris on Saturday to seek a co-ordinated approach to the turmoil in the banking sector.

Meeting twice a week in the Cobra emergency briefing room in the Cabinet Office, the NEC will effectively work as Mr Brown's economic "war cabinet" for the course of the financial crisis.

Chaired by the PM, it will also include Chancellor Alistair Darling and other Cabinet ministers with economic responsibilities as well as Whitehall mandarins, with the aim of co-ordinating action across the Government.

There was speculation this morning that its first meeting would see consideration given to an emergency bail-out scheme under which the Treasury could give the banks billions of pounds in return for shares if the crisis worsens.

Conservatives and Liberal Democrats yesterday indicated they would give their support to a recapitalisation scheme of the kind introduced in Sweden in the early 1990s, when the state took shares in a wide range of banks to guarantee their liquidity.

Writing in today's Financial Times, Tory leader David Cameron said: "The least that we need right now is orderly private sector recapitalisation... It is possible to imagine the circumstances in which Government injections of capital, with proper safeguards and strict conditions, may be the best way to protect the long-term interests of the taxpayer.

"Conservatives support Government action when the foundatnios of the banking system on which free markets depend are threatened. We will approach any proposals in a constructive and pragmatic way."

Mr Darling will brief the House of Commons on the credit crunch today in a statement to MPs on their return after the summer break.

The Chancellor said yesterday he was ready to take "some pretty big steps that we wouldn't take in ordinary times" in order to restore stability to the UK banking system.

But he rejected suggestions that he should free the Bank of England from its duty to keep inflation in check, in order to permit a sharp reduction in interest rates.

Many City observers expect the Bank's Monetary Policy Committee to agree to slice a quarter- or half-point off the base rate when it meets on Wednesday, but Liberal Democrat Treasury spokesman Vince Cable has warned that more dramatic reductions are needed to avoid a "once-in-a-lifetime financial collapse".