The Bank of England unveiled an ambitious plan on Monday to swap banks' risky mortgage assets for at least 50 billion pounds of government debt in the latest bid to spare the country from the ravages of a global credit crunch.

Central banks everywhere have been desperately trying to get confidence back into markets, but despite eight months passing and billions spent, banks remain afraid to lend money because they don't know each others' exposure to bad U.S. home loans.

The credit crunch has already taken down Northern Rock bank and concern is building over the financial system and the economy as new buyers are shut out of the housing market by cash-strapped lenders restricting mortgages.

Prime Minister Gordon Brown, whose popularity has slumped as voters lose faith in his handling of the economy, has made ending the credit crunch a priority, particularly as fears of a real estate crash have shot up in recent weeks.

Chancellor Alistair Darling said he would meet lenders on Tuesday to get them to do their bit - pass on interest rate cuts and help people refinance their mortgages.

Speaking to reporters after the plan was announced, BoE Governor Mervyn King said the Special Liquidity Scheme (SLS) would not make things better overnight but would at least give banks access to a greater pool of cash.

The 50 billion pounds was just a start and there was no arbitrary limit, he said.

"What we have to do is to create an environment in which a bank knows that not only it, but other banks, can come to the Bank of England and exchange their illiquid assets for liquid assets," he said. "It is restoring confidence in banks being able to deal with each other that is key in this."

Interbank lending rates fell modestly on Monday after the plan was announced, but are still some way higher than the BoE's main lending rate. Bank stocks, meanwhile, led the FTSE-100 index of leading shares lower.

Analysts remain sceptical about whether the scheme will be enough to prompt the economic rebound the government desperately needs. Bookmakers have now made the opposition Conservatives the hot favourite to win the next election, which must take place before May 2010.

"We still have doubts over the extent to which the scheme can address the fundamental problems in the housing market and wider economy," said Jonathan Loynes of Capital Economics.

NO BAILOUT

Under the scheme, banks can get one-year government bills for highly rated mortgage debt which can then be rolled over the at the central bank's discretion for up to 3 years. The six-month window for the plan opened on Monday.

King, who has long taken a hard line on the dangers of moral hazard in bank rescues, said the facility was in no way a bailout of banks as any government securities they got would come at a hefty price or, in the jargon, haircut.

Banks could find themselves receiving government bonds worth just 75 percent of the value of the assets pledged, depending on the mix of security, maturity, currency and availability of reliable market pricing, according to the conditions laid out in the plan.

Like its counterparts in Frankfurt and Washington, the Bank has been pumping extra cash to grease the wheels of the finacial system.

Since August 2007 the Bank has increased by 42 percent the amount of money it has made available to financial institutions. It offered 15 billion pounds in 3-month loans just last week. It also lent Northern Rock 25 billion pounds before the stricken mortgage lender had to be nationalised.

But liquidity injections have not helped get markets moving freely again and policymakers have been worried the credit crisis needed totally new measures, particularly after the collapse of U.S. investment bank Bear Stearns.

The U.S. Federal Reserve put together a similar scheme worth $200 billion (101 billion pounds) in March, but the BoE's plan is different in that it is for a much longer time.

King made clear banks will have to pay an additional fee to make sure they pay a market rate for the government debt. "This is not a gift," he said, rejecting the suggestion that the scheme required some quid pro quo from the banks.

King welcomed, however, the moves by some banks to recapitalise themselves. Royal Bank of Scotland, Britain's second largest bank, said on Monday it was considering a share issue and others in the sector are expected to follow.

JPMorgan estimates the capital shortfall of the four large banks - Royal Bank of Scotland, HBOS, Barclays and Lloyds TSB - at nearly 37 billion pounds. People familiar with the matter have told Reuters that RBS is seeking to raise over $20 billion.

Darling said in parliament on Monday that it was essential banks also start coming clean on their losses to get confidence back to markets.

"This proposal has started across the world including here in Britain with banks disclosing their losses and making proposals to rebuild their capital position," he said.