The Virgin-led consortium bidding for Northern Rock was locked in a last-minute dispute with the Treasury last night that threatened to derail its status as the Government’s favourite bidder for the troubled bank.

The Virgin bid group was still at odds with the Treasury over whether the consortium would accept changes to its offer after a deal had been done, ahead of the deadline for submitting bids this afternoon.

Yesterday a rival management team fighting for control of the Rock promised to inject at least £700 million into the company as it submitted its final offer for the company.

The Treasury and Goldman Sachs, its adviser, are expected to weigh up the two bids at the weekend and make an announcement on the favoured offer next week. The Government must present the deal for approval to the European Commission on March 17.

The Treasury had told both bidders to improve the terms that they had offered the Government in return for a guarantee by the State on a bond issue of £25 billion to £30 billion needed to prop up the bank.

Northern Rock’s management team said yesterday that as well as increasing its cash injection from at least £500 million to more than £700 million, it would offer better terms to the Treasury and shareholders. The team declined to give further details.

Sources said that the Treasury was putting pressure on the Virgin consortium to agree to make changes to its offer that might be suggested at the European hearing, should the consortium win the bid battle. Virgin has refused to allow its offer to be changed by European regulators after it has agreed a deal with the Treasury. A source said: “They’ll still put in a bid but without the agreement in it. It could mean losing the lead Virgin’s had.” Sources said that the Virgin consortium’s offer to the Treasury had always included a payment of £100 million to £200 million if the consortium turned the bank around within three years.

Meanwhile, the Treasury has rejected accusations that it had effectively taken control of Northern Rock. The Government had been accused by Northern Rock’s biggest shareholder, the hedge fund manager SRM Global, of breaching European state aid rules and also of acting as a “shadow director” of the bank.

SRM, which with RAB Capital, another fund manager, holds almost 20 per cent of the bank, said that the Government’s estimated £25 billion loan to the Rock did not meet the European Commission’s definition of state aid and, therefore, should be subject to more lenient repayment terms.

A Treasury spokesman said: “We got sign-off from the European Commission on this and they know what the law is because they created it.” He said that the Treasury had been scrupulous in ensuring that it did not give directions to the Rock board but had acted only as the senior secured creditor. Northern Rock shares closed down 6 per cent at 90p.

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