Labour has agreed to take part in a parliamentary investigation into the banking scandal after its demand for a judge-led public inquiry was rejected.
Shadow Chancellor Ed Balls said the party would cooperate with plans for MPs and peers to carry out the probe but insisted the case for an independent inquiry was stronger than ever.
Treasury select committee chairman Andrew Tyrie, who the Government wanted to run the inquiry, had threatened to pull out unless there was cross-party support. A Labour source said Mr Tyrie was an "honourable man" but claimed his inquiry would be "incredibly limited".
"The Government's position has been shown to be utterly shambolic," the source added. "No one can pretend this is the full-scale public inquiry into the culture and practices of the banking industry which the public wanted."
Labour will continue to push for a judge-led inquiry to be carried out into the wider issues of the City.
The move followed furious clashes between Mr Balls and Chancellor George Osborne over allegations that Labour was involved in the Libor rate-rigging scandal. Mr Balls denied any involvement and claimed Mr Osborne's "cheap and partisan" conduct "demeans the office he holds".
Labour and Westminster's minority parties wanted an independent "forensic" judicial public inquiry, claiming it is the only way to restore public faith in the disgraced industry. But the coalition insisted a parliamentary investigation is the best way to get speedy recommendations that can be included in a banking reform Bill early next year.
Meanwhile, the Treasury select committee announced Bank of England deputy governor Paul Tucker and Barclays chairman Marcus Agius, who announced his intention to resign after a replacement for chief executive Bob Diamond is found, will give evidence on the rate-rigging scandal next week.
Mr Tucker was dragged into the affair by Mr Diamond, who revealed a record of a conversation they had in October 2008 in which the deputy governor relayed concerns in Whitehall about Barclays' high Libor rates. The American banker said Mr Tucker was trying to warn him that "there are ministers in Whitehall who are hearing that Barclays is always high, that could lead to the impression that you are not funding yourself".
Barclays was dealt another blow earlier in the day as agencies Moody's and Standard & Poor's downgraded their outlook for the bank's credit rating in the wake of Mr Diamond's departure. The agencies said the departure of Mr Diamond, as well as Mr Agius and chief operating officer Jerry del Missier, could lead to the break-up of its powerhouse investment arm.