Britain’s banking sector was yesterday thrown into fresh turmoil as lending rates rose sharply amid fears that another bank had sought emergency funding from the Bank of England.

Shares in Britain’s banks plunged despite a statement from Barclays that its exposure to the sub-prime crisis was far lower than had been feared.

In the United States, the Federal Reserve was forced into its second massive cash infusion this month, injecting $47.25 billion (£23 billion) into the financial system – the largest input since the September 2001 terrorist attacks. The Dow Jones industrial average fell 173 points before recovering to close down 121 points at 13,110.

The injection, which came after a $41 billion infusion on November 1, was arranged after fears of further banking writedowns forced a rise in the interbank lending rate.

In London, the three-month London Interbank Overnight Rate (Libor) surged to 6.343 per cent in its biggest rise since September 6. The jump indicates an increasing reluctance among banks to lend to each other as fears of hidden sub-prime losses persist. One analyst said: “The market is concerned that somebody else might be borrowing from the Bank of England covertly.”

As many as eight indicative bids are expected today for all or part of Northern Rock, which at the peak of the credit crisis was forced to seek funding from the Bank.

Figures from the Bank suggest that £25.3 billion has been borrowed since Northern Rock secured its emergency credit line. Rock is so far understood to have borrowed at least £20 billion, but the precise figure is unknown.

Another analyst said: “We’re relatively sure that the Bank of England facility is not just going to Northern Rock.”

Alliance & Leicester shares were among those hit hardest yesterday, falling 21p, or just over 3 per cent, to 648p. HBOS closed down 25½p, at 783p. Royal Bank of Scotland lost 3.9 per cent, falling 18½p to 448½p.

In an analyst note yesterday, ABN Amro said: “There are persistent debt market rumours that the small mortgage banks are paying well over Libor to raise short-term debt.”

Meanwhile, credit default swaps on UK banks are at their widest since the credit crisis began, indicating that investors believe there is an increased risk of defaults among other mortgage banks.

Jonathan Pierce, an analyst with Credit Suisse, said that he estimated that Alliance & Leicester had about £10 billion of short-term financing commitments, while Bradford & Bingley needed £3 billion. “That’s why we are advising people to sell A&L shares because of the considerable uncertainties that still surround the sector,” he said.

Today is the deadline set by Black-stone, Citigroup and Merrill Lynch, as advisers to Northern Rock, for proposals to acquire all or part of Rock.

However, hopes of an early resolution are likely to be dashed because the Treasury has still not yet set the criteria for any rescue plan.

One adviser said: “The reality is the bidders are only part of the equation. I would have thought the bidders are going to have to lean on the Bank of England beyond the February deadline.”

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