Bail-out rules to be eased

The Prime Minister said the Treasury would look at improving the bail-out plan if the banks came up with reasonable suggestions.

His remarks came as a senior Labour MP predicted that ministers would restore City confidence in the deal by making it more attractive to private investors.

Treasury select committee chairman John McFall said that "a middle ground" between taxpayers and shareholders would soon be found.

LloydsTSB is lobbying Chancellor Alistair Darling to drop a five-year ban on paying dividends to private investors amid fears that it could undermine its takeover of Halifax Bank of Scotland. It wants Mr Darling to allow dividends to be paid after a year.

Treasury sources told the Standard that Mr Darling had only ever categorically ruled out a dividend within the first year.

"If the banks come up with a way of repaying half our shares back earlier, for example, then maybe there could be a small dividend payable," one source said. Fresh hopes of a "clarification" of the plan came as Brussels revealed that the British government had not originally wanted to impose a draconian five-year ban on dividends for private investors in Royal Bank of Scotland, HBOS and LloydsTSB.

Jonathan Todd, spokesman for EU Competition Commissioner Neelie Kroes, confirmed that it was the EU that forced the UK to toughen up the terms of the deal to comply with curbs on state aid. Downing Street refused to elaborate on Mr Brown's comments, saying any statement about the Government's discussions with the banks would be highly market sensitive.

Mr McFall told BBC Radio 4's World At One programme: "We have to ensure that dividends are paid to make it attractive for investors to come in.

"I'm quite optimistic about this and I think a middle ground is going to be found to reward the shareholders but also to protect the taxpayers. We must have that primary aim to ensure confidence. We can only get confidence if we reward shareholders."

Mr McFall blamed difficulties with the deal on the fact that it was "devised over 72 hours of a weekend".

Business Secretary Lord Mandelson today took a significant step towards clearing the way for the creation of the LloydsTSB "megabank" with new powers to change competition laws.

He urged the House of Lords to allow the Enterprise Act to be amended so that "maintenance of stability" of the economy could override fears of a lack of competition.

"It is critical that in those cases where a proposed merger could bolster financial stability in the UK's economy, the overall public interest is served by a proper consideration of the need for stability, alongside the implications for competition," Lord Mandelson said.

Nervous banks were finally starting to respond to Mr Brown's rescue package by lending more freely to each other. The London interbank offered rate, or Libor - the rate at which banks are prepared to lend to each other - was dropping: today's three-month Libor eased from 6.21 per cent to 6.18 per cent.

Libor - used as a benchmark for many mortgage deals - is forecast to fall more steeply to 6.07 per cent next week when the Bank of England says it will make it easier and cheaper for banks to borrow money from the Government. This should pave the way for more competitive new mortgage deals.

However, market activity was rather less encouraging. By 3.30pm the FTSE-100 index of Britain's biggest companies was down 151.2 points at 3840.5.