Lloyds TSB demanded penalty-free loans worth up to £30 billion over two years as part of its proposed deal to rescue troubled mortgage bank Northern Rock, it emerged today.

The Bank of England, the UK's lender of last resort, made clear it rejected the demands and deemed it "inappropriate" to help fund a bid by one bank for another.

The Bank, sharply criticised by Northern Rock management yesterday for the failure of the mooted takeover, also said Lloyds TSB made its approach a week before the run on the Tyneside mortgage bank in mid-September.

It said: "On the weekend of September 8 - 9, the Tripartite Authorities [the Bank, Treasury and the Financial Services Authority] were informed that a potential bidder wanted loans of up to £30 billion over one to two years, without a penalty rate of interest, as part of the deal."

The Bank charges 1 per cent above base rate, currently 5.75 per cent, for its standby loans facility and does not disclose the penal interest rates it charges emergency borrowers.

"The authorities, including the Bank of England, recognised the advantages of a takeover," the Bank said.

It added: "They also agreed that in the circumstances it would be inappropriate to help finance a bid by one bank for another."

The Bank's move to defend its position casts fresh light on the dynamics surrounding the rescue bid for the Rock, initially thought to have taken place over the weekend of September 15-16, and before the Treasury intervened to stop the bank run and guarantee the rights of its depositors.

Lloyds TSB has never confirmed that it was the bank behind the failed takeover attempt. The Bank did not confirm its name today. Lloyds TSB declined to comment.

The Bank added: "The following weekend, after support for Northern Rock had been announced (by the Treasury) on 14 September, the Bank was asked whether the support facility would continue to be available in the event of a successful bid."

The Bank agreed that it would be.

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