The firm's $100 billion mortgage book will now pass into public hands, with its branch network taken over by Spanish financial services giant Banco Santander.
Shares in B&B had dropped precipitously over recent days, as investor confidence in the financial sector and inter-bank lending continued its downturn.
Watchdog the Financial Services Authority was reported to be searching for a firm to take over the lender, continuing the trend of bank consolidation in the UK.
Alliance & Leicester was taken over by Santander earlier this year, while market leaders HBOS merged with Lloyds TSB this month - and, with its stock trading 95 per cent down on its New Year level, B&B was earmarked to be next.
However, so toxic was its mortgage book considered to be that no interest was forthcoming from rival institutions.
Announcing the nationalisation yesterday in a statement, Britain's treasury said: "Following recent turbulence in global financial markets, B&B has found itself under increasing pressure as investors and lenders lost confidence in its ability to carry on as an independent institution."