High Street banks have told Alistair Darling they will not pass on any further interest rate cuts to consumers and businesses.

The banks have warned the chancellor they are “not charities”. They said they could not afford further to reduce mortgage payments and interest rates to businesses if, as expected, the Bank of England continued to cut rates as the economy fell deeper into recession.

The tough line from the banks will anger taxpayers, coming just a month after the government injected £37 billion into Royal Bank of Scotland (RBS), HBOS and Lloyds TSB to protect them from the credit crunch. Northern Rock and Bradford & Bingley have already been rescued by the taxpayer.

Most main banks have responded to the 1.5 percentage point cut made by the Bank of England on Thursday. The only two big lenders not to have trimmed their rates are HSBC and Barclays, which both avoided the Treasury-backed bailout.

Bankers, who were summoned to a meeting at the Treasury on Friday morning, have told Darling that these latest cuts, which took bank rates to a 54-year low at 3%, represented a “line in the sand”.

“Base rates are now so low that our margins are desperately small,” said one bank executive. “This point was made quite clear to the chancellor by several of the executives — we are not charities.”

During the meeting, which was attended by executives of eight major banks, it is understood Darling indicated that the three part-nationalised banks — RBS, HBOS and Lloyds TSB — would be placed under greater pressure to pass on any cuts.

When told that banks might not pass on Thursday’s rate cut to their customers, Darling said he would consider “prescriptive” measures to force the banks to do so.

“It was a difficult meeting,” said one banking source. “Right at the start the chancellor’s people thrust unflattering newspaper headlines under the executives’ noses.” A Treasury spokeswoman described the chancellor as “firm” with the banks at Friday’s meeting. “They all agreed to pass on all, or at least nearly all, of the rate cut to their customers.”

Interest rates are expected to fall below 2% next year. Some City economists believe there is a good chance of a pre-Christmas cut of one percentage point.

The bankers also repeated their concerns that Libor — the rate at which banks lend to one another and which broadly determines their ability to lend to mortgage-holders — remains substantially higher than the Bank of England base rate. However, the three-month Libor rate fell by 1.07 percentage points to close at 4.5% on Friday, the biggest fall since 1992.

Vince Cable, the Liberal Democrats’ Treasury spokesman, said: “The banks cannot be allowed to hold the consumer to ransom like this, especially now Libor is falling. If base rates fall, mortgage lenders must pass this on to their customers.”

Treasury officials confirmed yesterday that the chancellor’s pre-budget report, due this month, could include tax help for families and small businesses.

The Centre for Economics and Business Research, a consultancy, is calling for a cut in Vat from 17.5% to 12.5% until the end of 2009, to help prevent a deep recession.

Though Brown has won plaudits for his handling of the crisis, an ICM poll for The Sunday Telegraph today gives the Conservatives a healthy 13-point lead. The Tories are on 43%, Labour 30% and the Liberal Democrats 18%.

Meanwhile, two former chief executives of Bank of Scotland and RBS are trying to stage a boardroom coup in which they replace the board of HBOS and sabotage the bank’s proposed £12 billion merger with Lloyds TSB.

Sir Peter Burt and Sir George Mathewson wrote to Lord Stevenson, HBOS’s chairman, claiming that the Treasury’s plan to inject money into the banking sector meant the merger was “no longer necessary”.

It also emerged last night that Lloyds TSB is providing financial support to HBOS through a £10 billion loan facility, in a covert agreement between the two banks.

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