Alistair Darling, chancellor, is braced for an order by the European Commission seeking the shrinking of Lloyds Banking Group as a condition for the granting of state aid.

Treasury officials believe Brussels could insist that the bank shrink its balance sheet – possibly through asset disposals – or accept restrictions over its behaviour in the market.

Lloyds admitted the possibility that the commission could impose restrictions in a prospectus issued yesterday as part of its £4bn placing and open offer. These could include selling noncore or even core assets.

Talks between officials at the Treasury and Brussels have been under way for some weeks.

Financial Times