George Osborne at the Mansion HousePlans for a multibillion-pound emergency bank funding scheme to kick-start lending to households and businesses have been unveiled.

Bank governor Sir Mervyn King and Chancellor George Osborne announced they were working together on a "funding for lending" proposal to ward off a worrying new phase of the credit crunch.

Under the proposals, expected to be worth around £80 billion, British banks - facing higher funding costs and under pressure to put more capital aside - will be offered vital funding at low interest rates.

But the funding will be linked to bank lending performance in what marks a direct attempt to free up the log-jam in credit hitting the economy.

The scheme is expected to be in place within a few weeks and will last for four years.

In a speech to the Mansion House in the City of London, Sir Mervyn said: "Today's exceptional circumstances create a case for a temporary bank funding scheme to bridge to calmer times."

The Governor also said the Bank would be activating facilities which offer liquidity to banks of at least £5 billion a month that were first announced last December to help pump cash into the system.

Mr Osborne said: "We are not powerless in the face of the eurozone debt storm. Together we can deploy new firepower to defend our economy from the crisis on our doorstep."

He added: "The Government - with the help of the Bank of England - will not stand on the sidelines and do nothing as the storm gathers. We are rolling up our sleeves and doing everything possible to protect British families and firms."

The moves follow increasing calls for action from the Bank and Treasury to do more to help banks and steer the UK economy through the eurozone crisis. The Bank has already pumped £325 billion into the economy through its quantitative easing scheme and has maintained interest rates at record lows of 0.5%.