The Bank of England’s decision to cut rates by 0.5 per cent to 4.5 per cent – a day ahead of its planned interest rate announcement – came as part of a coordinated global effort by central banks to calm the financial crisis.

Hours earlier the Government announced a scheme that will see taxpayers fund a £50 billion part-nationalisation of the UK’s biggest banks to help halt the meltdown in the financial sector.

In all the Government is making almost £500 billion of fresh money available.

London’s FTSE 100 Index rallied in the early part of the day in response to the rate cut, with stock markets across Europe also fighting back from hefty earlier losses but plunged later by more than 4 per cent in another day of market turmoil.

Banks were among those leading the Footsie’s initial turnaround, already boosted by news of the taxpayer-backed rescue deal.

Under the plans unveiled by Chancellor Alistair Darling the financial sector will be offered a range of extraordinary measures.

The package will see public cash used to buy stakes in stricken banks.

Eight UK banks and building societies – including Royal Bank of Scotland, Barclays, HBOS, Lloyds TSB and Nationwide – have signed up to an initial £25 billion scheme.

And the Government said it stood ready to make at least another £25 billion available for other eligible institutions.

The Bank of England – alongside its interest rate reduction – is also taking emergency action to help ensure that banks have enough cash to run their day-to-day activities.

It is pumping another £200 billion into money markets under its existing Special Liquidity Scheme that allows banks to swap risky assets for Treasury bonds.

The Government is also making a further £250 billion available for banks to guarantee debt.

Prime Minister Gordon Brown described the plans as “bold and far-reaching”.

He also moved to reassure that taxpayers would have the potential to “earn a proper return”.

Central banks around the world cut interest rates in yesterday’s coordinated response, with the European Central Bank, the US Federal Reserve, Sweden’s Riksbank, The Swiss National Bank and the Bank of Canada all reducing rates by half a per cent.

Chancellor Alistair Darling also confirmed he was flying to Washington to further discuss global action on the financial crisis.

It is hoped that the Government’s banking package will provide the capital boost needed and help restore confidence to get banks lending to each other again.

But the Government is demanding that in return for the public-backed cash injection, banks must cap executive pay and shareholder dividends and commit to supporting lending to homebuyers and small businesses.

Meanwhile, two banks – Lloyds TSB and Britain’s biggest mortgage lender Halifax – passed on the rate cut to borrowers with standard variable rates.