Mortgage lender Bradford & Bingley (B&B) is to be nationalised, the government has confirmed.
The government will take control of the bank's £50bn mortgages and loans, while B&B's £20bn savings unit and branches will be bought by Spain's Santander.
Under the move, all B&B savings accounts are protected, and taxpayers are being shielded from any losses.
B&B is just the latest bank that has needed rescuing in a turbulent period for British financial institutions.
It follows after the announcement two weeks ago that HBOS is being bought by Lloyds TSB, and Nationwide's takeover of smaller building society rivals Derbyshire and Cheshire.
Prime Minister Gordon Brown said the move showed the government would "do whatever it takes to ensure the stability of the UK financial system".
The move also came on another eventful day of global financial turmoil:
Wachovia, the fourth-largest US bank, was bought by larger rival Citigroup in a rescue deal backed by US authorities
Benelux banking giant Fortis was partially nationalised by the Dutch, Belgian and Luxembourg governments to ensure its survival
The Icelandic government took control of the country's third-largest bank, Glitnir, after the company had faced short-term funding problems
Shares in Europe and Asia fell sharply, while in the US, Congress voted on a $700bn (£380bn) plan which aims to bail out Wall Street and ease the credit crisis.
'Lost confidence'
"Following recent turbulence in global financial markets, Bradford & Bingley has found itself under increasing pressure as investors and lenders lost confidence in its ability to carry on as an independent institution," said the Treasury.
It added that the move would protect savers' money and that B&B's branches, call centres and internet operations would "be open for business as usual to provide continuity of service to customers".
BBC business editor Robert Peston said it was a good deal for taxpayers, and that the risk was "quite close to nil".
Under B&B's nationalisation, taxpayers are being protected from any losses because of the Financial Services Compensation Scheme.
This means that if B&B's remaining assets prove insufficient, the balance will ultimately be paid by the wider UK banking sector, although Chancellor Alistair Darling said that possible scenario remained a long way down the line.
Shadow Chancellor George Osborne told the BBC that he would study the exact details of the deal, but that protecting taxpayers had to be the main priority.
'Good news'
Abbey, which is part of Spanish banking group Santander, is paying £612m to buy B&B's savings business and 197 branches.
Abbey chief executive Antonio Horta-Osorio said the acquisition of B&B's bank's savings account was "good news" for customers.
"They can be certain that their hard-earned savings are with a bank they can trust."
To help facilitate Abbey's takeover of B&B's savings business and branches, it has been paid £14.6bn from the Financial Services Compensation Scheme - funded by the Bank of England - and a further £4.5bn from the Treasury.
This £19.1bn is to guarantee that Abbey could pay back all B&B savings account customers, if need be.
The government says it will get the money back - starting with the Treasury's £4.5bn - following the redemption and sale of B&B's mortgages, that are now in public hands.
A spokeswoman for Abbey said while it was "business as usual" for B&B's branches, it was too early to say whether any would close in the long term.
However, with Santander already owning both Abbey and Alliance & Leicester, it appears likely that there will be some branch closures.
And the B&B, which currently has about 3,000 staff, has for the time being stopped offering any new buy-to-let or self-certified mortgages through its internet business Mortgage Express.
The company told mortgage brokers it was "working through the full ramifications" of the nationalisation.
Funding problems
B&B is the second UK bank to be nationalised since the start of the global credit turmoil, following Northern Rock's move into state ownership in February this year.
Speculation had intensified in recent weeks that B&B was approaching a funding crisis, leading to a growing number of customers withdrawing their funds.
B&B got itself into financial difficulty as a result of the credit crunch removing the option of raising funds through the global wholesale money markets.
Its problems were then further intensified by its focus on the buy-to-let market, which has seen a large rise in bad debts as UK house prices have fallen.
B&B has also struggled to fund a number of takeovers.
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