The Chancellor today said that the Government will guarantee Northern Rock deposits in a bid to halt the run on the embattled bank.

Treasury officials said the pledge - which was dubbed "unprecedented" by City experts - constituted a "cast iron" guarantee that Northern Rock customers would not lose money should the bank collapse.

The statement from Alistair Darling came after Britain's fifth-largest mortgage lender was deluged by worried savers for a third day as customers again lined up at Northern Rock branches to empty their accounts.

As much as £2 billion was withdrawn by Northern Rock savers on Friday and Saturday after the mortgage lender was forced last week to go to the Bank of England to seek emergency funding.

BACKGROUND

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Earlier today, savers wishing to withraw cash from Northern Rock's Moorgate branch in London faced a five-hour wait to get their money. Others were turned away and handed a form to apply by post. Over the weekend, the bank's website collapsed amid a scramble to move funds.

In a dramatic move calculated to dispel the gathering public panic, Mr Darling today said the Government and Bank of England would ensure that customers’ savings were “safe and secure”.

He added: “Should it be necessary we and the Bank of England would put in place arrangements that would guarantee all the existing deposits in the Northern Rock bank during the current instability in the financial markets."

The Treasury suggested that similar mechanisms could be put into place to assist other lenders.

Northern Rock shares were down 35 per cent at the close in London, despite its efforts to reassure customers and investors it remains a "viable" business.

Rival lender Alliance & Leicester was down 31 per cent. The plunge signals investor fears that the problems to have hit Northern Rock problems could spread to other banks, who also relied on the ready supplies of cheap money that have dried up in recent weeks amid a global credit crunch.

Treasury sources said the guarantee offered by the Government to Northern Rock customers would exceed the £31,700 limit on the normal guarantee for depositors at a bank. They added that it was not anticipated that the guarantee would cost public money, since Northern Rock still has substantial assets and remains solvent.

But experts said the Chancellor's statement threw up a host of questions. "Is the Government saying it will guarantee interest payments? Who now sets interest rates at Northern Rock?" said one.

The move will also ignite a fresh debate over "moral hazard" - the risk that by bailing out imprudent lenders and borrowers the Government will foster similar irresponsible behaviour in the future.

Northern Rock said that the Chancellor’s statement made it clear that all savings are safe and secure. “Consequently anybody who is in a queue outside a branch, or who is trying to access an online account can be fully reassured that there is no cause for concern whatsoever,” it said.

It told Thomson, the news agency, that it was not in discussion with any other party over a possible takeover of the bank.

On Northern Rock's third day of turmoil, Mr Darling also prepared to meet the US Treasury Secretary Henry Paulson, who is set to have talks with Prime Minister Gordon Brown.

Speaking earlier today, Mr Darling told the BBC: “Hank Paulson and I both agree what’s necessary is more discipline is needed in the financial system and far more openess.”

He added: “In this country, banks who have plenty of money need to start lending to each other again.”

David Cameron, te Conservative leader, said: “This Government has presided over a huge expansion of public and private debt without showing awareness of the risks involved.

“Under Labour our economic growth has been built on a mountain of debt. And as any family with debts knows, higher debt makes us more vulnerable to the unexpected.

“In short, the increases in debt in the UK economy - personal, corporate, and Governmental - have added a new risk to economic stability.”

Northern Rock's falling share price helped drag the FTSE 100 index down 106.5 points at 6,182.8 at the close of trade in London, having been as low as 6,168.0 earlier in the session.

The FTSE 250 index, widely seen as a better barometer of the health of corporate Britain, closed 208.7 points lower at 10,745.3.

In the US, the Dow Jones Industrial Average was down about 50 points at 13,392.5 as the London markets closed, with the market trading nervously before tomorrow’s interest decision by the Federal Reserve.

Northern Rock is now worth just £1.1 billion - less than half its £2.6 billion value on Thursday evening, before it emerged the Bank of England had bailed it out. The lender had been worth £5.2 billion peak just seven months ago.

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