The high-risk measures aimed to restore confidence in the banking system after two days of stock market chaos and spiralling fears over the global financial system.

But they fuelled speculation in the City about whether the merger of HBOS with Lloyds TSB, which threatens thousands of Yorkshire jobs, was still necessary.

Gordon Brown stunned MPs when he announced the cut in interest rates to 4.5 per cent at midday yesterday. It was part of a joint move with governments in Europe, America, Canada and China aimed at boosting the troubled global economy, and came the day before any decision was expected.

It followed hours after Chancellor Alistair Darling unveiled an eyewatering £500bn package – aimed at getting banks to lend to each other again – which will see the Government take stakes in several high street banks, effectively part-nationalising them.

The package won backing from the banks as well as across the floor of the Commons, although it failed to stem the slide on the FTSE100, which fell by five per cent amid growing fears of recession.

On another day of drama in the financial world, up to 300,000 savers who have money in stricken Icelandic banks were told the Government would guarantee their money – although councils who have tens of millions of pounds invested were less certain over theirs.

Amid further warnings of a looming recession, struggling furniture retailer Land of Leather, which has six stores in Yorkshire, reported an 87 per cent drop in annual profit yesterday, falling foul of an economic downturn and weakening consumer confidence. It warned 2009 would be challenging as it reported a pre-tax profit for the year to August 3 of £2.3m compared with £18.5m last year.

There was relief, however, for borrowers as several major banks – including Britain's biggest mortgage lender Halifax – passed on the interest rate cut to those with standard variable rates. Another 4.2 million households who have tracker mortgages will also benefit.

The momentous day began with the unveiling of the £500billion package by Mr Darling after Treasury officials worked through the night.

Eight high street banks and building societies have signed up to the deal in which the Treasury will make £50 billion available for banks to strengthen their finances in exchange for the Government taking preferential shares.

For a fee, the Bank of England will also provide guarantees of around £250 billion on loans between banks, aimed at easing the pressure in frozen money markets.

And the Government has doubled its Special Liquidity Scheme – which allows banks to swap risky assets for safer Treasury bonds – to £200 billion.

Mr Darling insisted taxpayers would get their money back – as long as banks were able to repay – and the Government would negotiate conditions to the money, although he could not meet Tory demands for limits to bankers' payouts.

"This is not a time for conventional thinking or outdated dogma but for the fresh and innovative intervention that gets to the heart of the problem," Mr Brown said.

Barclays boss John Varley said: "The package addresses the most significant issues in the market, namely confidence in the strength of the banking system and the working of the money markets."

But some City insiders questioned whether the HBOS/Lloyds tie-up was still needed.

One said: "This deal was struck when HBOS was in danger of going bust, but that's no longer the case. It now looks like a great deal for Lloyds, but a bad one for HBOS."

Sources close to HBOS called on local MPs to fight the takeover and save thousands of Yorkshire jobs.

One insider asked whether the Lloyds takeover should be allowed to go ahead now that HBOS had guarantees on its funding, adding: "If the Government had acted sooner, HBOS wouldn't be in this position. There is definite cause to question whether this deal now needs to go ahead."

Influential shareholder group the UK Shareholders Association (UKSA) described the takeover as a "shotgun marriage" encouraged by the Treasury.

Communications director Roger Lawson said: "HBOS shareholders never did like this deal and, if they can find an excuse to back away, they will. And there are problems on both sides – Lloyds is not wild about taking on HBOS's mortgage book."

Last night HBOS insisted the merger was "very much on track" and work on the deal was "going well".

Halifax MP Linda Riordan and Calder Valley MP Christine McCafferty are due to meet Mr Brown to fight to save HBOS jobs if the merger goes ahead and last night Ms Riordan said: "If there's a way of keeping Halifax as HBOS, I would go for that option but I need to talk to Gordon and find out whether that really is an option."

Minister for Yorkshire and the Humber Rosie Winterton said Mr Darling's package would help small businesses struggling to get loans, and she welcomed the fact both HBOS and Lloyds TSB were taking part in the scheme.

"It's perhaps too early to speculate on further implications in terms of the merger," she said.

Yorkshire Forward chief executive Tom Riordan said: "We believe this funding for the banking system is good news for the financial services sector and businesses in the region as it will enable companies to continue to access the finance that's vital to them operating effectively."