Gordon Brown appeared to step back from a G20 declaration to introduce a bank tax after Downing Street insisted that he was merely trying to open a debate on raising new money from the City.

Last night it emerged that Downing Street had wanted to reopen a dialogue among G20 countries over taxing the world biggest economies on capital markets transactions to compensate society for the damage that they have caused.

At the St Andrews G20 meeting this weekend, Gordon Brown had shocked the City and taken other G20 countries by surprise when he said that he wanted to tax bankers every time they made a trade.

However, within hours of the Prime Minister unveiling the proposal, Timothy Geithner, the US Treasury Secretary, appeared to dismiss such a proposal and said he was unwilling to commit to the plan.

At the weekend, Downing Street was quick to point out that a number of countries in Europe had backed Gordon Brown’s suggestion. It is understood that Mr Brown does not perceive the tax as punitive. However, it is broadly agreed that unless the proposals were to be adopted multilaterally they would be unworkable because banking services would move to accommodate the most favourable tax regime.

The issue of a so-called “Tobin tax” was raised by Adair Turner, chairman of the Financial Services Authority, this summer, when he argued that the City needed to have more of a social function.

His comments received broad acclaim from an electorate that believes that it has bailed out well-remunerated bankers at a time when unemployment is rising to one in ten of the workforce. Political parties on both side of the House of Commons are desperate to demonstrate to voters that they are adopting a tough line with the City after it emerged that the Office for National Statistics said the banking crisis had cost Britain £1.5 trillion to rectify.

Many people within the City believe a transaction tax would be unworkable because the premise of such a levy is deeply flawed, and argue that is unlikely to change trading behaviour.

Christine Lagarde, France’s finance minister, welcomed Mr Brown’s comments, but French officials said they were not confident the UK would press the issue with a general election looming.

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