LONDON (Reuters) - British authorities are working on a plan to break a lending squeeze gripping the home loan market and could announce details as early as next week, a source close to the situation said yesterday.

Pressure has been growing on the government and the Bank of England to do more to resolve a mortgage debt crisis that is threatening to slam the brakes on the British economy. News of possible swift action lifted sterling and boosted bank shares.

Banks' fear that high-risk mortgage debt is lurking on balance sheets has driven the interest rates at which they are prepared to lend to each other well above the BoE's five-percent benchmark, in turn raising borrowing costs for households and companies.

The new plan is expected to allow banks to temporarily swap mortgage-backed securities for government bonds to help free up their balance sheets and allow them to lend more to consumers.

The package "could come as early as next week. We're working closely with the Bank of England on this," the source told Reuters, on condition of anonymity.

"This is a high priority but the important thing is that we get the details right and we're focusing on that."

Finance minister Alistair Darling is due to meet mortgage lenders next week on his return from a visit to China.

Banks have warned lending could halve this year and, with elections due by May 2010, Prime Minister Gordon Brown's Labour government — its popularity on the slide over its handling of the economy — wants to ensure borrowers are not priced out of the market.

It is also desperate to stop another bank getting caught in the crunch after Northern Rock was nationalised this year.

A debt swap scheme, similar to one the US announced last month, could make banks more willing to lend to each other at lower rates and could ultimately mean the BoE may not have to cut interest rates as aggressively as markets have been betting on.

"It should mean that some of those (banking) names become counterparties again rather than just names banks don't want to lend to," said ABN Amro strategist Jason Simpson.

"Libor (interbank lending rate) is a couple of basis points lower, so it's clearly already having a beneficial impact," Simpson said. Three-month sterling Libor eased to 5.90625 percent from 5.92438 percent.

However, financial market analysts remain sceptical that the plan will be far reaching enough to fix the credit crisis.

"It clearly alleviates the pressure but, if you look at what has happened in the United States and Europe, you can see that there is still a lot of tension in money markets. It doesn't solve everything," UBS credit strategist Geraud Charpin said.

Banks have been toughening up their terms and raising loan rates for consumers even though official UK borrowing costs have fallen three times since December.

Consumer confidence has fallen to historic lows and house prices fell in March at their sharpest rate since the recession of the early 1990s.

Shares in UK banks, battered since the squeeze took hold last August, rose on hopes that the lending package would improve liquidity and ultimately profitability.

"What we thought could lead ultimately to rights issues may not be the case now, because what you have is some short-term relief that could be extending to the medium term," banking analyst Mamoun Tazi at MF Global said.