The Governor of the Bank of England yesterday ruled out an extension of the special liquidity scheme (SLS) and cautioned against a government guarantee for home loans.

The SLS, which started in April, was designed to unblock the mortgage market by allowing lenders to swap mortgage-backed securities for Treasury bills for up to three years.

The window of opportunity for banks to apply for help via the SLS will close as scheduled on October 21 but the Treasury is understood to have considered extending the cut-off date, or lengthening the three-year agreement.

But speaking yesterday to the Treasury Select Committee, Mervyn King said that the scheme would come to an end on the agreed date, and that permanent funding for lenders could not be provided by a central bank.

The Bank will not disclose the value of Treasury bills traded with banks until after the October deadline, but some estimate that it could be as much as £200 billion.

However, Mr King said that the Bank would introduce a new scheme to help lenders experiencing liquidity problems over the short term. He gave three months as an example of the time frame, but said that more detail would be published in a consultation document on the scheme next week.

He emphasised that the new scheme could not be a de facto source of funding for mortgage lenders.

“I hope everyone will understand that the proposals to be published next week, important though they are, will not and cannot solve the shortage of funding to finance bank lending, including mortgage lending,” he said.

In comments that appear directed at Alistair Darling, he also gave warning against following the lead of the US which nationalised mortgage giants Fannie Mae and Freddie Mac at the weekend, action that was warmly received by the markets on Monday.

The Times reported on Tuesday that the Chancellor was contemplating a separate multibillion-pound plan for the Government to guarantee high-quality mortgage-backed securities.

Mr King said a public-sector guarantee for mortgages was neither needed nor wanted, cautioning that taxpayers would shoulder the risk. “The idea that guaranteeing mortgages can somehow not be a credit risk for taxpayers ... is an illusion,” he said.

The Chancellor is known to be eager to act to kick-start the market out of its malaise and said at the weekend that the bailout of Fannie Mae and Freddie Mac would help the British economy.

The Government is considering its options on the mortgage market ahead of the publication of a report by Sir James Crosby, the former chairman of HBOS, due at the end of the month.

But Mr King said that guaranteeing mortgages, or setting up the equivalent of a public-sector mortgage bank to provide mortgages directly, would “undercut the incentive of private-sector banks to get their own balance sheets in order”, which he said was the root of problems in the US.

In another shot across the Government's bows, Mr King said that it would not be easy for Mr Darling to spend his way out of the economic slump, as breaking his own fiscal rules could eventually cause inflation to rise.

“The long-term risk is [that] a fiscal framework that is not perceived by financial markets to be credible does put up pressure on inflation expectations, because it undermines the market's belief in the credibility of both the monetary and the fiscal framework,” he said.

Mr King also cautioned that the continued fall in house prices was likely to prevent a full recovery in the market for asset-backed securities, on which many lenders rely to secure a proportion of their funding.

He suggested this could result in new financial instruments being developed. “It is too early to predict the demise of asset-backed securities, but the business model will need to adjust,” he said.