Mr Darling said allowing HBOS to collapse would have had knock-on effects for all of Britain's banks.
"If we had not intervened... the banking system would have gone down, taking millions of families, millions of businesses with it. No responsible government could have done that," he said.
The extent of HBOS' problems were revealed in a week when the City watchdog, the Financial Services Authority, said it had raised concerns about the way the bank was being run as far back as 2002.
Mr Clarke told the BBC's Today programme that the merger had been disastrous, particularly for Lloyds TSB.
He added: "They should never have been allowed to merge. Lloyds TSB was a boring bank, it was a steady bank, it hadn't done silly things."
Liberal Democrat treasury spokesman, Vince Cable said: "Obviously we need to digest the detail, but it looks increasingly as if Lloyds HBOS will now go into majority public ownership, followed inevitably by nationalisation."
The Chancellor refused to rule out nationalisation of Lloyds but insisted a range of options remained open to help the banking sector.
He said the key was getting banks to identify their bad assets so they could be removed from the system.
The expected losses at HBOS were £1.6bn more than it predicted in November.
Much of the blame has been laid at a £7bn write-down at its corporate division, which is heavily exposed to the hard-hit housing and commercial property sectors.
Lloyds chief executive Eric Daniels insisted the company's longer term prospects were brighter.
"Lloyds Banking Group has the largest UK financial services franchise, with excellent long-term earnings potential," he said.
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