The Chancellor announced that Northern Rock, Royal Bank of Scotland and Lloyds Banking Group will be split up to recoup taxpayers' cash following the bail-out of the banking sector.

The "viable" part of the completely nationalised Northern Rock could be sold off by the end of this year, he said.

Private investment was also being sought to reduce the taxpayers' exposure to RBS and Lloyds, which are both majority-owned by the state.

Mr Darling indicated that different parts of both banks would be sold separately to newcomers to the sector as part of its "reconstruction".

Yorkshire Forward chief executive Tom Riordan said he hoped extra competition in the banking sector would make it easier for Yorkshire's small businesses to obtain funding.

He added: "The central factor (in the recession) has been the lack of credit. Anything that can increase the competitiveness of the market to help small businesses we would welcome."

Ged Nicholls, general secretary of the Accord union, which represents former HBOS workers at the Lloyds Banking Group, told the Yorkshire Post that he hoped any sell-off would be done in a "thoughtful way, rather than in the eye of the storm".

Speaking about the sell-off on BBC1's The Politics Show, Mr Darling said: "What you really want to do is have quite a substantial divestment – perhaps branches or perhaps particular institutions that they own – made available to other people.

"Because unless we get competition we are going to end up with half a dozen big providers which would be a big reduction in choice and that would not be acceptable."

The new-look banking sector would take shape over a matter of three or four years, he said. Mr Darling said he would not countenance "fire sales" of any of the taxpayers' banking assets, although it would soon be in a position to dispose of part of Northern Rock.

"We will be able to split Northern Rock by the end of the year but I'm not going to rush into a sale. We will only sell when the time is right and when the price is right," he said.

"I'm determined that because the taxpayer put a lot of money into stabilising the system, the taxpayer is entitled to get that money back."

He indicated that the "profitable part" of Northern Rock would be the first to go, which will raise concerns that the state will be left with only the bank's toxic assets.

But the Chancellor insisted that the remaining parts of the bank were "not all bad" and would "come back" in time.

He did not confirm newspaper speculation about the exact form of the new banks to emerge from the break-up plans. They were said to include the return of TSB and Williams & Glyn's branches to the high street, as well as a so-called BankCo created out of Northern Rock.

He confirmed that he was looking for investors who were not currently in charge of British banks.

Potential buyers are thought to include Tesco and Virgin, as well as foreign buyers.

Shadow Financial Secretary Mark Hoban said: "We have long warned it would be a bitter irony if we emerged from this crisis with a banking system even more concentrated than the one that contributed to this crisis.

"It is vital however that the Government does not simply sell off the taxpayers' shareholding to the highest bidder – without considering the wider implications for a competitive, healthy banking sector."

Liberal Democrat Treasury spokesman Vince Cable said: "It is obviously right that British retail banking becomes more competitive in order to stop the continual ripping off of customers."