STEWART PATERSON and MARTIN WILLIAMS

Banks and the financial markets are set for critical changes today as details of the historic £50bn bailout, expected to include the government taking large stakes in RBS and HBOS and the resignation of Sir Fred Goodwin, began to emerge last night.

The size of the government's investment in RBS and HBOS would mean it holding a majority share of the banks, which would likely result in it having representatives on the ruling boards.

The move would be the biggest nationalisation deal in recent history, giving the state control of one-third of bank branches in an attempt to stave off a financial crisis.

In the wake of the rescue, the original plan for a proposed merger between HBOS and Lloyds has reportedly been abandoned owing to the need for structural changes following the bank's share price collapse.

Both HBOS and Lloyds last night insisted that their deal was still within reach, but industry sources said that there would have to be "serious adjustments" made to the merger plan with it "not as it was" in the light of the wholesale rescue package offered by the government.

The immediate future of Andy Hornby, chief executive of HBOS, also looked uncertain.

Last night's developments came just hours after EU leaders announced they were to follow Britain's lead and put a "co- ordinated" plan in place to rescue European banks from the global financial meltdown.

RBS, having previously denied rumours of Sir Fred's demise, significantly was refusing to refute the reports last night. Sources have revealed that the RBS chief executive's position became untenable as it seeks a massive lifeline from the government and its value slumped by 61% to less than £12bn in a week.

RBS said nothing would be confirmed officially about the terms of any deal until the results of "high-level negotiations" over the funding injection were revealed this morning.

Sir Fred's demise is expected to be cushioned by a pension pot of £8.4m, although it is understood he has waived £1.2m in salary to which he is entitled. He is expected to be replaced by Stephen Hester, chief executive of British Land.

A formal announcement was due to be made on the Treasury's recapitalisation plans before markets open today.

Initially the banks will try to raise what they can from private investors with a share issue, but the taxpayer will guarantee to purchase whatever stock cannot be sold.

A five-year plan to secure the way banks lend to each other was also confirmed as Prime Minister Gordon Brown outlined his remedy for the crisis in France yesterday.

Mr Brown emerged from a crunch summit in Paris after convincing other EU countries to follow his blueprint.

"I am confident after talking to my European colleagues that more liquidity, funding for the medium-term loans necessary for businesses and mortgages and the recapitalisation of banks are part of their thinking as well," he said.

"The difficulty that we have got at the moment is in restoring confidence in the banking system. I believe that the action we have taken in Britain will restore that, and we will see worldwide action that will also see confidence restored."

Trading of bank shares could be suspended today so that details of the announcement can be digested. The rescue comes after a tumultuous week in the financial markets, with the FTSE-100 closing on Friday at its lowest level in five years, down 8.9%. Markets in France fell by 7% and Germany by 8%.

In the US the Dow Jones fell to its lowest level in five years after markets plunged in the last few minutes of trading. The IMF then warned of a further 20% fall in the value of world stocks.

Bank of England governor Mervyn King has reportedly told the banks to ask for more than they need, meaning their capital position would be strengthened sufficiently to absorb shocks and a long recession. Reports yesterday said that HBOS needs £10-12bn, RBS £15-20bn, Lloyds TSB £3-5bn and Barclays £5-9bn to survive the meltdown.

Barclays, which has already said it is considering raising other capital, may return to the same overseas funds behind its £4bn fundraising earlier this year.

First Minister Alex Salmond said yesterday that the current financial climate was making it difficult for the Scottish economy to grow.