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The money will be used to provide guarantees on mortgage-backed securities in a bid to kick-start the wholesale money market, which has dried up in the face of the credit crunch.

The move is in line with a recommendation put forward by former Halifax Bank of Scotland boss Sir James Crosby in his final report on mortgage finance, which was published in November.

Banks traditionally sell on bundles of their mortgages to investors, in a process known as securitisation, to raise the money they need to lend to consumers.

But because the market for these products has dried up, banks have become increasingly reliant on using money from depositors to fund their mortgage lending, contributing to the current mortgage drought.

The Council of Mortgage Lenders estimates that net lending will be negative this year, with homeowners repaying £25 billion more than they borrow through mortgages.

Lenders are also demanding increasingly high deposits from customers, with only three mortgages currently available to people with just a 5% deposit and 74 for those with a 10% one.

Instead, the majority of loans require borrowers put down at least 25%, while a 40% one is now needed for one in four mortgages.

There will be restrictions on which institutions can be accepted into the Asset-backed Securities Guarantee Scheme, while only bundles of loans with the high AAA credit rating can be used.

The mortgages being securitised must also have been written after January 1 2008, while they cannot have had a higher loan to value ratio than 90% when they were first arranged and the homeowners must not have adverse credit histories.

The Council of Mortgage Lenders (CML) welcomed the scheme, which it has been calling for some time.

CML director general Michael Coogan said: "The most important element of this Budget for the mortgage market over the long-term may prove to be the new Asset-backed Securities Guarantee Scheme.

"This potentially offers an opportunity to restart the capital market funding for mortgages that will be a crucial factor in delivering an adequate supply of mortgage credit."

Gillian Charlesworth, director of external affairs at the Royal Institution of Chartered Surveyors, said: "Addressing the availability of mortgage funding is a key factor in unblocking the depressed UK housing market.

"A Government backed guarantee mechanism is a welcome, although long overdue, intervention to help address this problem. This should allow the recent increase in buyer inquiries to translate into an increase in sales."

Peter Bolton King, chief executive of the National Association of Estate Agents (NAEA), also welcomed the move.

He said: "The NAEA called on the Government to do more to boost liquidity in the market and we welcome this measure.

"Our figures show that there is a huge demand for property that is being frustrated because responsible people do not have access to appropriate levels of finance.

"Hopefully this measure will go some way to alleviate that, and I would just call on the Government to monitor carefully that this measure has gone far enough and step in if it isn't."