LONDON (AP) — The British government moved yesterday to break up the country's two biggest retail banks, imposing a major shake-up on the financial sector as it exacts payback for last year's massive state bailout at the height of the financial crisis.

The government also injected billions of pounds more of taxpayer funds into Royal Bank of Scotland PLC and Lloyds Group PLC, underscoring worries the banking sector is not out of trouble yet.

The change effectively pumps almost £40 billion ($65 billion) more into the two banks and could result in the creation of as many as three new commercial banks.

The move to make the banks sell off some of their businesses approach comes at the insistence of European regulators to ensure competition in the banking industry after the government's initial £37 billion rescue package last October.

The British government also extracted promises from RBS and Lloyds for new restrictions on bonuses to align pay with long-term performance, reflecting demands from disgruntled taxpayers that the previous culture of big payouts based on short-term gains — and excessive risk taking — not be allowed to continue.

"These changes are better for the taxpayer, better for the banks, and better for the economy," Treasury chief Alastair Darling told lawmakers. "They will mean stronger and safer banks better able to support the recovery."

But the reform plan raised eyebrows by more than doubling the funds that the government has invested in the British banking system, one of those hit hardest by the global credit squeeze. The RBS bailout now exceeds the $45 billion given by the US government to each of Citibank and Bank of America.

The plans to reduce the size of the banks come amid an international debate about whether large banks should be broken up to prevent so-called "too big to fail" syndrome.

The government has already announced it will split Northern Rock PLC, the victim of Britain's first bank in more than a century, into two but it has rejected suggestions by the Bank of England that banks' retail functions be hived off from their more speculative ventures.

In the United States, the Obama administration has also shied away from suggestions that all large lenders be broken up for safety, maintaining that strong, large banks play an important role in the economy.

The government will buy £25.5 billion of "B" shares in RBS to strengthen its capital, taking its current 70 percent stake closer to full nationalisation at 84 percent. It also granted tax changes worth up to £11 billion and set aside a further £8 billion to support the bank if its position deteriorates badly.

The government will spend another £5.7 billion exercising its right to buy new stock issued by Lloyds in a planned record-breaking £13.5 billion rights issue, holding its stake at 43 percent.

The extra funding injection is a reminder that even though world economies and markets have improved since the first bailout a year ago, Britain remains in recession and economists have warned that the road ahead remains rocky.

Danny Gabay, the director of Fathom Consulting in London and a former economist with the Bank of England, said the new recapitalisation was "a real jolt" to the economy.

"We keep being told that the recession is over," he said. But he said the infusion of extra cash into the banking sector "clearly demonstrates that it's not healed. Far from it."

"If there really was a robust recovery on the way, why would these banks be in such trouble?"