CAMPAIGNERS were celebrating last night after the government agreed to cap 'payday loans', blamed for plunging the poor into a deadly "debt spiral".

Ministers bowed to pressure in the House of Lords, after an amendment was tabled by the Bishop of Durham and Paralympian Baroness Tanni Grey-Thompson, who lives in the North-East.

The Financial Services Bill will now be amended to give a watchdog the teeth to act on "legal loans sharks" which prey on the vulnerable who have nowhere else to turn for credit.

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Protests have grown over online payday loan deals that can be completed in under an hour. In one example, £250 borrowed for 14 days would see £290.78 repaid - at an annual rate of 4,214 per cent.

The move delighted Jenny Chapman, the Darlington MP who has long campaigned for a cap, who said: "The exploitative rates charged by payday lenders must end. Britain is behind many other countries."

The Labour MP praised the Right Reverend Justin Welby - the Bishop of Durham, who will be the next Archbishop of Canterbury - whose intervention gave the campaign a huge boost.

In the Lords, Bishop Welby pointed out the "moral case" for a crackdown, telling peers: "It's bad for us, it's bad for the clients, it's bad for all of us in the country when this is permitted to happen."

And Baroness Grey-Thompson warned that £2bn was now being leant by payday companies to four million people, adding: "It's essential that we get this right. These people are already in a very difficult situation."

The breakthrough came when the government agreed to give muscle to the new Financial Compliance Authority (FCA) to act against rogue lenders - prompting the withdrawal of the Bishop's amendment.

Lord Sassoon, a Conservative Treasury minister, pledged it would have "specific powers to impose a cap on the cost of credit and ensure that the loan cannot be rolled over indefinitely".

It would also go further by strengthening consumer protections and ensuring a breach of these rules would "make the agreement unenforceable by the lender".

Treasury sources ridiculed Labour claims of "victory", insisting the Bill had already proposed giving the FCA to take action and that it was merely ensuring there were no loopholes.

Some peers were cautious, demanding to see the exact word of the government's motion before agreeing to pass the Bill, next week.

Ministers had been accused of dragging their heels on promised action to curb an explosion in the number of high-interest lenders, which include Wonga - the sponsors of Newcastle United.

Campaigners have called for strict caps on loans and fees, modelled on a successful scheme in Florida. Germany and France have also taken action.