Mr Osborne told the British Chambers of Commerce: "If you hear the stories about the cuts and still wonder why our country needs to take these difficult decisions, then look at what is happening around us.

"First Greece, then Ireland, today Portugal. All of them countries that did not convince the world they could pay their debts. Two of them countries with smaller budget deficits than Britain.

"Now all of them being bailed out, at huge costs to their populations.

"Today of all days we can see the risks that would face Britain, if we were not dealing with our debts and paying off our national credit card. These risks are not imaginary - they are very very real.

Few economists think Spain is in line to become the fourth member of the eurozone's bailout club anytime soon following a raft of austerity measures which have included tax increases, public sector wage cuts and the raising of the retirement age from 65 to 67.

Nevertheless, Spain faces extremely difficult times in the years ahead. Unemployment stands at 20pc with grim growth prospects. Thousands of young Spaniards are expected to demonstrate tonight against the austerity measures.

Portugal's caretaker prime minister José Sócrates said the country had been taken after the stricken nation had run out of options.

Economists put the UK's involvement in a Portuguese bail?out at up to a potential £4.4bn.

After months of resisting having to apply for a bail?out from the EU and the International Monetary Fund, Portugal's cost of borrowing has reached unsustainable levels.

Addressing the nation last night Mr Sócrates, said: "I have always said that asking for aid would be the final way to go, but we have reached the moment."

It is understood that the rescue fund could be as high as £70 billion, or ?80 billion.

Sources close to the Treasury said that Britain would take part in any Portugal?related discussions involving the EU's 27 member states. However, the type of bail?out is yet to be discussed and therefore the extent of the UK's exposure was impossible to gauge, the sources said.

It is understood that a bilateral loan from the UK to Portugal has not been requested and that the Treasury does not foresee any circumstances under which such a request would arise. Britain paid a bilateral loan to Ireland but George Osborne said this was because Ireland was a "friend in need", a major trading partner with a banking sector closely linked to the UK's.

European shares rose on Thursday, led by banking stocks. However, traders were wary ahead of an expected interest rate rise in the eurozone later today and there were worries that the bailout may not signal the end of Europe's sovereign crisis.

José Manuel Barroso, the European Commission president, said that Portugal's request for help would be dealt with as quickly as possible. He assured Mr Sócrates that Portugal's request would be "processed in the swiftest possible manner, according to the rules applicable". He also said he had "confidence in Portugal's capacity to overcome the present difficulties".

The Portuguese government had previously said that the country did not need outside help and was able to finance its own debt.

Observers were last night wondering whether contagion from Portugal would spread to other eurozone countries such as Spain, whose economy is significantly larger than that of Portugal, Ireland and Greece combined.

Portugal had earlier promised to pay investors high rates of return to take up government bonds due to be repaid in six and 12 months, its second bond auction in less than a week.

The new economic crisis confronting Europe comes weeks after an EU summit to confirm a new permanent 700 billion euro bail-out facility for eurozone countries in trouble.

The UK will not be liable for any contributions from that fund, but is included in the current temporary ?440bn bail-out fund which was set up to help Greece and which runs until mid-2013.

The temporary fund has already been used to bail out Ireland, and now Portugal is expected to come calling to prop up its economy and shore up the shaky credibility of the euro.

That would oblige the UK to contribute under the terms of the temporary rescue scheme signed up to by then Chancellor Alastair Darling, and which was fiercely opposed at the time by George Osborne, who took his job after the election.

Now Mr Osborne may have to preside over the extension to Portugal of the UK commitment, albeit in the form of financial guarantees rather than actual cash.

UK Independence Party leader Nigel Farage said the UK should refuse to contribute to any bail-out.

Mr Farage said: ''The full tragic reality of the euro is now being seen. Bailing out Portugal is utterly pointless, it only traps them into a system into which they are totally unsuited. Britain should not contribute a single penny to their bail-out.''