The Government has taken B&B's £41 billion loan book on to the public balance sheet and guaranteed around £9 billion in other commitments related to the bank.

The move follows Northern Rock's nationalisation in February, which has added £87 billion in debt.

B&B's savings business and its branches – with 2.7 million customers and £20 billion in deposits – have been sold to Spanish bank Santander for £612 million.

Santander owns Abbey and recently agreed to buy Alliance & Leicester – so the deal will give it 1,286 branches and a 10% share of the UK retail savings market.

The deal comes just two weeks after a £12.2 billion rescue takeover of Halifax Bank of Scotland was announced.

Today's break-up will mark a dramatic end to a business which can trace its roots back more than 150 years.

The Financial Services Authority (FSA) decided on Saturday morning that B&B was not strong enough to continue as a deposit-taking bank after the recent financial turmoil undermined confidence in the firm.

Chancellor Alistair Darling told GMTV: "My priority was to protect savers and depositors but also to ensure we got a good deal for the taxpayer.

"We had to stabilise the situation in order to protect the banking system as a whole, just as we have done on previous occasions."

The Treasury said it would be "business as usual" for the firm's savers and borrowers.

B&B, which became a bank in 2000, has around 3,000 staff and 197 branches, and was the last former building society to retain its independence after the nationalisation of Northern Rock and July's announced takeover of Alliance & Leicester.

The Financial Services Compensation Scheme has paid out £14 billion – a loan funded by the Bank of England – to allow B&B's retail deposits to be transferred to Abbey.

The Treasury is paying a further £4 billion to cover those deposits not protected by the FSCS – those with savings of more than £35,000 – and will then take on the Bank of England loan.

The Government argues that the risk to the taxpayer is minimal because the loans will be paid back by mortgage redemptions as B&B's lending business is wound down. Virtually all of the lender's loans would have to default for the taxpayer to lose out.

The Treasury's £4 billion will be the first to be paid back, with wholesale deposits next in line and then the £14 billion paid out by the FSCS.

Banks will pay the interest payments on the FSCS loan, with the first £450 million instalment due next autumn.

Any remaining funds could mean some payout to B&B's legion of more than 900,000 shareholders. The lender's shares have been cancelled, with compensation to be paid in "due course", the Treasury said.

Legislation approving the deal is likely to be passed when Parliament returns next week.

Anto Horta-Oso, Abbey's chief executive, said: "This is good news for Bradford & Bingley's savings customers. They can be certain that their hard-earned savings are with a bank they can trust."

But the B&B brand will remain within Santander, which has a total of 60 million customers in more than 40 countries worldwide.

B&B has been squeezed by the credit crunch hiking its funding costs, and the housing market slowdown casting doubt over its main buy-to-let business.

The firm has seen bad debts and arrears soar, lost millions on complex mortgage-backed investments hit by the turmoil, and its investment status downgraded by ratings agencies – making it more expensive for the group to do business.

The lender has also taken an £18 million hit from organised fraudsters hitting the wider buy-to-let sector by gaining bigger mortgages than properties are worth.

The group will continue to be led by chief executive Richard Pym in the initial period of public ownership. Mr Pym succeeded Steven Crawshaw, who stepped down for health reasons in June.

SANTANDER CAPITALISES ON CREDIT CRUNCH

The nationalisation and break-up of cherished high street name Bradford & Bingley has underlined how some global players have spied opportunity amid the turmoil.

Spanish bank and Abbey owner Santander will pay £612 million for B&B's savings business, after agreeing to pay £1.3 billion for another struggler – Alliance & Leicester – less than three months ago.

The deals will leave it with an estimated 10% of the UK savings market, almost 1,300 branches and a total of around 24 million customers.

B&B's 2.7 million customers and 197 branches will also boost Santander distribution channels for mortgages and other products.

Spain's largest bank was founded in 1857 and has around 60 million customers in 40 countries.

Its size and the strength of its funding base compared to faltering rivals has put it in a strong position to capitalise following the credit crunch.

Abbey relies on money markets for just 10% of its lending, has no exposure to sub-prime mortgages and funds the lion's share of its loans through customer deposits.

While rivals have been forced to cut back on lending, Abbey overtook Halifax Bank of Scotland as the biggest lender of new mortgages in the UK in the first half of this year, accounting for around 26% of the market.

Since buying Abbey in 2004, Santander has made no secret of the fact it wanted to increase its share of the UK banking market and the group's current acquisition trail is a fast and effective way to do this – particularly at a time when bargains are to be had.

But with the housing market in freefall, any further assault on Britain's mortgage market has been put on hold as Santander concentrates on bolstering its savings base.

Despite the effective merger of the three businesses, competition in the savings sector should still be healthy, analysts said.

Panmure Gordon analyst Sandy Chen said: "The read-across for the UK banking sector is that Santander is now on roughly the same level as the Big Four – Lloyds-HBOS, RBS, HSBC and Barclays.

"We'd expect the presence of five major competitors will keep competition – especially for customer deposits – lively."

Santander was one of a trio of banks which combined to buy Dutch bank ABN Amro last year but has fared much better than its two partners, Royal Bank of Scotland and Belgian bank Fortis.

Royal Bank of Scotland was forced to call on shareholders for £12 billion in the biggest rights issue to date earlier this year to strengthen its finances.

And Fortis was handed an 11.2 billion euros (£8.9bn) cash injection by the governments of Belgium, Luxembourg and the Netherlands yesterday amid insolvency fears and must sell its share of the ABN business.