Ed Miliband has promised a "reckoning" with the banks as he unveiled his plans to force the big five high street giants to give up branches and open up the market to new competitors.
In a heavily-trailed speech, the Labour leader confirmed that a Labour government would impose a US-style cap on the market share that any one bank can have in personal accounts and small business lending.
If the party wins the next general, he said that the Competition and Markets Authority would be instructed to report within six months on how to create a least two new "sizeable and competitive banks" to challenge the existing high street lenders.
"This is not about whether we should have new banks - the question this Government is still asking - but about how," he said.
"It is not about creating new banks that control some tiny proportion of the market, but new banks that have a substantial proportion and can compete properly with existing banks.
"And we are not asking whether existing banks might have to divest themselves of significant number of branches. We are asking how we make that happen."
Speaking at the University of London, Mr Miliband said that with just four banks controlling 85% of small business lending, the financial services sector had proved a "poor servant" of the real economy.
"We need a reckoning with our banks, not for retribution but for reform," he said.
"In this country, over decades we have seen greater and greater concentration in our banking system. I am determined that the next Labour government turns that tide.
"I want to send a message to all the small and medium sized businesses of our country: under the next Labour government, instead of you serving the banks, the banks will serve you once again."
Earlier, shadow business secretary Chuka Umunna acknowledged that the move would affect the share price of the two predominantly state-owned banks - Royal Bank of Scotland and Lloyds.
"I'm not denying in the short term that you may see a hit on the share price of these banks - it's probably happening as we speak now. But the reason we are doing this is so that we can grow our small businesses," he said.
He also signalled Labour's irritation with Bank of England Governor Mark Carney who earlier this week told MPs that capping the banks' market would not lead to a "substantial improvement" in competition.
"I think it is not healthy for us to involve governors of the Bank of England in big political debates," he told BBC News
Business Secretary Vince Cable said the Government had already taken action to increase competition among high street lenders, with new challenger banks entering the system, supported by the Government's business bank.
He said that imposing "arbitrary ceilings" on the market share of banks was not a "sensible way" of increasing competition.
"We do need competition in the banking sector but he is in danger of re-inventing the wheel," he told BBC News. "The proposals Ed Miliband put forward this morning don't really add to anything we have already got. "
Prime Minister David Cameron said the Government had had to deal with the problems it inherited from the last Labour government.
"We've been clearing up the mess made by Ed Miliband and Ed Balls and sorting out our banking system, and it's much stronger than the mess we inherited from Labour," he said during a visit to a road improvement project on the A11 in Suffolk.
"But what we really need is a whole economic plan - one that builds the roads and railways, that helps the small businesses, that creates the jobs, that cuts people's taxes. That's what this Government's delivering and that's what the country needs."
Treasury Minister David Gauke said around £1 billion had been wiped off bank shares this morning.
He told BBC News: "I notice that a lot has been wiped off the value of the shares of those banks this morning so I don't know how helpful that is in terms of that national interest because that's UK taxpayers who have lost out."
Asked how badly they had lost out, he replied: "We'll see over the longer term but I think it is something like £1 billion this morning."
Mr Miliband sought to play down any difference with Mr Carney - insisting they were agreed on the issue.
"To be fair to the Governor of the Bank of England, he hadn't seen my speech, it hadn't been delivered," he said as he took questions following the speech.
"He said something which I actually agree with, which is that on its own a market share threshold is not enough.
"Of course that's right because actually we will have a whole set of other changes that I am talking about today to make this happen. Better portability of accounts, a proper credit history for small businesses.
"So I think he is absolutely right to say we need a whole set of changes to make this happen."
Asked about the potential damage he risked doing to the value of taxpayers' shares in the bailed-out banks - he said reforming the system had to be the top priority.
"There could be no bigger damage inflicted on the long term interests of the British economy than failing to sort out this problem," he said.
"Unless we sort out our banks - both the issue of too-big-to-fail and the issue of the way they serve the real economy - then that is the biggest threat that our country faces.
"So we are going to make the necessary reforms and it is absolutely the right thing to do."
Labour was not saying banks had to "give away" branches he said.
The Labour leader declined to speculate on the level of the proposed market share cap - which would be for the Competition and Markets Authority to set.
"It is not for me as a politician to dream a figure out of the air," he added.
It was "absolutely right" that the limit should also apply to institutions whose "organic growth" took them over the threshold, he insisted - saying they would face an immediate investigation by regulators.
Mr Miliband was tackled several times over why the previous Labour administration of which he was a part had not tackled the causes of the cost of living "crisis" which he acknowledged dated back many years.
"We did lots of things to tackle some of the issues that people faced in terms of the cost of living, like tax credits which made a big difference to a lot of people," he said.
"What I don't think we did enough of was changing the way our economy works before you get to tax and benefits so actually you are generating more of the high-paying, secure jobs we need, like for example in banking."