The Serious Fraud Office (SFO) has confirmed that it has formally launched an investigation into the rigging of inter-bank lending rates.
The case could lead to criminal charges being brought against individuals.
Its involvement follows an investigation by US and UK regulators into the manipulation of Libor, which resulted in a record fine for Barclays.
The Chief Secretary to the Treasury, Danny Alexander, said he was "delighted" by the decision.
"As a government, we will make sure the SFO has all the resources it needs to conduct this investigation in full," he said.
"I want the SFO to follow the evidence wherever it goes, to bring prosecutions if they can."
Last week the bank agreed to pay £290m in penalties after its traders tried to rig inter-bank lending rates, sometimes working with staff at other financial institutions.
Regulators are continuing to look into possible rate manipulation at other banks, while the US Department of Justice is carrying out its own criminal investigations.
An SFO spokesperson confirmed that a dedicated case team had now started work, but would not say whom it was investigating.
Its short statement said only: "The SFO Director David Green QC has today decided formally to accept the Libor matter for investigation."
The Libor affair, described by the prime minister as a scandal, has led to the resignation of three of Barclays' most senior executives in a matter of days, including chief executive Bob Diamond.
He appeared before MPs on the Treasury Select Committee this week, when he called the behaviour of those responsible for Libor rigging at the bank "reprehensible".
Regulators in the UK and the US found that Barclays staff had tried to affect rates over a number of years, first for profit and then to reduce concerns about how much it was being affected by the financial crisis.
The SFO is responsible for investigating allegations of serious and complex frauds. It considers whether to prosecute using a number of criteria, including whether it is a matter of public concern, and whether the value of any fraud is more than £1m.
The government agency said a few days ago that it was considering whether a criminal prosecution was appropriate and possible, and said this could take a month.
"Normally when there is such a public outcry, the law enforcement agencies manage to act in a more accelerated pace," said Bradley Simon, a former US federal prosecutor who now defends clients in fraud cases.
He said the SFO would be sensitive to criticism that it had been slow to respond in the past.
"They have to show they are on top of this. There are a lot of angry people out there," he told BBC News.