The British government yesterday issued a formal guarantee to customers of Northern Rock in an attempt to end the crisis at the beleaguered mortgage lender.

Alistair Darling, the British chancellor of the exchequer, said the government would guarantee all the bank's existing deposits. The move goes well beyond the government's existing guarantee, which protects 90 per cent of deposits up to £35,000 (€52,000).

Mr Darling's comments came as concerns that other banks could suffer a similar fate to Northern Rock prompted shares in Alliance & Leicester (A&L) to plunge 31 per cent.

A&L, Britain's eighth-largest lender, was the hardest hit on a day which also saw steep falls in shares in companies such as Bradford & Bingley, another small mortgage lender, and HBOS, the UK's fourth-largest bank.

The Irish banks continue to feel the effect of the turmoil in the UK, with significant declines in the four main banks helping to wipe more than €4 billion off the value of the Irish market.

Anglo Irish Bank alone had more than €730 million wiped off its market capitalisation yesterday as its shares fell 7.7 per cent. The stock is now almost 14 per cent weaker since the Northern Rock crisis broke.

AIB was down 6.4 per cent while Bank of Ireland lost 5.4 per cent and Irish Life & Permanent closed 4.4 per cent lower.

As a group, Irish financial stocks have shed 9.5 per cent of their value in just two sessions.

Northern Rock's problems have prompted a sharp reassessment of the risks facing lenders that are partially dependent on funding from the capital markets.

But yesterday's share sell-off - which was echoed in Germany and Spain - also reflects growing concerns that the liquidity squeeze in the banking system will lead to slower economic growth and could prompt a fall in property prices across Europe.

Mr Darling said that, "should it be necessary, we and the Bank of England will put in place arrangements that guarantee all the existing deposit arrangements".

The state guarantee came after savers again besieged the bank's branches. About £2 billion has been withdrawn since Thursday, when the bank applied to the Bank of England for emergency funds.

In a statement to the stock exchange last night, Northern Rock said: "The chancellor's statement makes it clear beyond any doubt that all savings in Northern Rock 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."

Northern Rock's share price continued to plunge yesterday. As the bank attempted to reassure savers that they would be able to withdraw all of their deposits, shareholders bailed out of the stock amid a growing realisation that any takeover of Northern Rock would only happen at a very low price.

Northern Rock shares, which fell 31 per cent last Friday, lost another 35 per cent of their value yesterday.

People familiar with the matter said the bank and its advisers were planning a new push to find a "commercial solution" that would allow it to be sold as a going concern.

Northern Rock said last night that it was not in discussion "with any other party at the present time", although it held out the prospect of such negotiations.

Northern Rock held talks with Lloyds TSB, the UK's fifth-biggest bank, as recently as last Monday. Those discussions were undermined by the turmoil in the credit markets and the Bank of England's reluctance to offer financial support to facilitate a deal, people familiar with the matter said.

However, the central bank on Sunday indicated that the credit line it had provided to Northern Rock would not be removed in the event of a sale. "We have agreed that any bidder would be able to take on the facility for any unexpired term left," it said.