The centrepiece of the Government’s plan to unclog Britain’s money markets could be disrupted by European regulators because it falls foul of state-aid rules, competition lawyers said yesterday.

The Bank of England’s scheme to free up Britain’s home loan market by injecting £50 billion into the banking sector risks contravening the rules because it gives unfair advantage to British banks over rivals, experts say.

Anthony Woolich, head of competition for LG, the business law firm in London, said: “It seems to me that this is prima facie state aid because this scheme gives banks operating in the UK an advantage over other European banks operating outside the UK.”

Mervyn King, the Bank’s Governor, unveiled the bonds-for-mortgages plan this week to try to encourage banks to resume lending to each other. Alistair Darling, the Chancellor, said it was hoped that the move would revive the mortgage market. However, last night lawyers gave warning that because it was primarily British banks that stood to gain from the rescue package, and because of the duration of the scheme, the plan was sure to raise eyebrows in Brussels.

The Treasury has denied that the scheme contravenes state-aid rules because the funding is available to all financial institutions that have a franchise in the UK, and not just British banks.

Yet lawyers argued that it was clear that the plan was designed to help to address the growing crisis in Britain’s housing markets. They also pointed out that it was the heads of Britain’s biggest banks who met Gordon Brown and Mr King before the announcement of the £50 billion plan.

If the European Commission were to find that the package breaches its rules, it could order that the loans be paid back more quickly than expected, and at penal rates of interest.

The six biggest British banks have all undertaken to use the Bank facility. HBOS yesterday completed the creation of securities backed by £9 billion of home loans - which would qualify for the swap arrangement.

Another leading competition lawyer, who declined to be named, said: “You can argue that it’s a general attempt to improve the system in general and everyone can participate, but in reality it’s a measure aimed at helping the British banking sector.”

The Commission said it was staying in constant contact with the Government as the Bank rescue plan comes into effect. One Brussels source last night said: “Even if the Commission does not think that the measures amount to state aid, it will want all the details to make absolutely certain.”

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