UPDATE 8-Britain provides billions to shore up banks

(Retops, adds details on per capita cost, EU approval)

By Sumeet Desai and Luke Baker

LONDON, Oct 8 (Reuters) - Britain pledged hundreds of billions of pounds to rescue its banking system on Wednesday and joined other major economies in cutting interest rates to tackle the global financial crisis.

In a sweeping move that Prime Minister Gordon Brown said was as bold as the $700 billion U.S. bailout, Britain said it would make 50 billion pounds ($87 billion) of new capital immediately available to retail banks using taxpayers' funds. [nL8631417]

It was also a bold political move for Brown, a former finance minister who has struggled to connect with voters since becoming prime minister 18 months ago.

Three weeks ago, he was battling for his political survival. But the deepening financial crisis and his handling of it has helped him regain ground in opinion polls.

The plan guarantees interbank lending by around 250 billion pounds to help unfreeze wholesale markets and extends a Bank of England scheme that swaps banks' risky assets for government debt to provide 200 billion pounds of cash to the system.

The package was quickly approved by the European Union, which must authorise state-aid programmes, and looked likely to be mirrored in one way or another by other major European economies, including France and Spain.

The plan, launched just four days after the U.S. financial bailout, also received cross-party support in Britain's parliament, although some opposition lawmakers criticised Brown for taking too much risk with taxpayers' money.

The total value of the re-capitalisation together with the bank guarantees -- 300 billion pounds -- is equivalent to 5,000 pounds ($9,000) per person in the United Kingdom. By contrast the U.S. bailout is worth about $2,000 per American.

"We have led the world today with a proposal to restructure our banking system," Brown said after emergency overnight talks with banking chiefs. "We are taking the steps that I believe that other countries will take in the future."

Brown has written to his Group of Seven counterparts urging them to make similar guarantees on interbank lending ahead of finance ministers and central bankers meeting in Washington this weekend, a G7 source told Reuters.

Britain will demand a big say in the direction some of its biggest banks now take as the price for its rescue plan.

"We have now entered a new era for global banking. In return for taxpayers' money the state will gain a level of control over their governance, pay, and lending practices," said Paul Niven, head of asset allocation at fund manager F&C. [nL8140802]

The support plan was announced just hours before a co-ordinated 0.5 percentage point cut in key interest rates around the world led by the U.S. Federal Reserve, underlining the scope and threat of the financial meltdown as a year-long credit crunch tightens its grip. [nLAE000218]

Britain's bailout followed a dramatic fall in the value of banking shares on the London stock exchange on Tuesday, with major lenders losing half their value amid investor fears they could collapse without a liquidity lifeline. [ID:nL87769]

Most of the worst-hit banks recovered their losses after the plan was unveiled on Wednesday but the main stock index in London, the world's second largest financial centre was still down 4 percent even after the coordinated rate cuts.

FINANCIAL BACKING

Despite the negative market reaction, most financial analysts and foreign officials were encouraged by Britain's unilateral move, which they thought would help to unfreeze money and capital markets and encourage similiar action in Europe.

"It contributes to the stability of the British financial system and we know what importance that has for the European financial system," said Germany's deputy finance minister, Joerg Asmussen.

Following Britain's announcement, French President Nicolas Sarkozy called for more EU-wide action to stem the crisis.

Investors said the importance of the deal went well beyond the interests of shareholders. Banks might, it was hoped, resume doing what banks were intended to do -- loan money to feed the economy, potentially saving businesses and jobs.

"This package is operating at two levels -- immediate capital strengthing, takes out all the future issues in terms of future (capital) raising, and allow banks to operate with some degree of higher certainty," said Emanuelle Ravano, Managing Director, Pimco Europe.

In all, seven British banks, Abbey (SAN.MC), HSBC (HSBA.L) RBS, HBOS, Barclays (BARC.L), Lloyds TSB (LLOY.L) and Standard Chartered (STAN.L) and the country's largest building society, Nationwide, have committed to increase their total Tier 1 capital, a main measure of bank's financial strength, by 25 billion pounds in total as part of the government's scheme.

The government said it would make 25 billion pounds available to these institutions as preference share capital or permanent interest-bearing shares, which offer a more guaranteed form of income for the holder -- ultimately the taxpayer.

In return the government will require banks to meet certain terms and conditions that will include banks making commitments to support small businesses and home buyers and to deal with what many see as too generous pay deals for bank executives.

For a TAKE-A-LOOK on the UK package click on [ID:nLL8647259]

To see a factbox on the measures click on [ID:nL8631417] (Writing by Andrew Callus; editing by Ralph Boulton; additional reporting by Raji Menon)