LONDON (Reuters) - The Bank of England (BoE) unveiled an ambitious plan yesterday to swap banks' risky mortgage assets for £50 billion or more of government bills, in the latest bid to spare Britain from the ravages of a global credit crunch.

Central banks globally have tried desperately to inject 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 US home loans.

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

Prime Minister Gordon Brown, whose popularity has slumped as voters lose faith in his handling of the economy, has made jump-starting the mortgage market a priority for his government as fears of a housing market crash have shot up in recent weeks.

His finance minister Alistair Darling will meet with lenders today and is expecting them to do their bit for the economy by passing on the BoE's three interest rate cuts to consumers.

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

The £50 billion was just a start, 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 yesterday after the plan was announced but are still some way higher than the BoE's main lending rate. Analysts remain sceptical about whether the scheme will be the silver bullet required.

"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.

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 three years.

Mr. King, who has long taken a hard line on the dangers of moral hazard, 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 will also have to pay an additional fee to make sure they pay a market rate for the government debt. "This is not a gift," said Mr. King, but he rejected the suggestion that the scheme required some quid pro quo from the banks.

He welcomed, however, the moves by some banks to recapitalise themselves.

Royal Bank of Scotland (RBS), Britain's second largest bank, said yesterday it was considering a share issue and others in the sector are expected to follow.

JP Morgan estimates the capital shortfall of the four large UK banks - RBS, HBOS, Barclays and Lloyds TSB - at nearly £37 billion.

People familiar with the matter have told Reuters that RBS is seeking to raise over $20 billion.

Finance Minister Mr. Darling will make a statement to parliament later and is expected to call on financial institutions to make a full and early disclosure of their losses.

The government urgently needs an economic rebound. Yesterday, bookmakers made the opposition Conservatives the hot favourite to win the next election.