The Government has put Ernst & Young, the accountancy firm, on standby to step in as administrator of the UK assets of Landsbanki.

The administration would have huge implications for the embattled British high street because a large part of it, including the Icelandic retail group Baugur, is funded by Landsbanki and its Icelandic rival Kaupthing Singer & Friedlander, of which Ernst & Young is already administrator.

The problems surrounding the future of the Icelandic-backed stores groups is becoming increasingly politicised. Baugur employs 55,000 staff and City sources say a £100 million loan granted by the Bank of England to the struggling Landsbanki on Monday helped to give the bank sufficent liquidity to start relending to the British retailers that banked there.

The administration of Landsbanki would also have serious diplomatic repercussions for the already strained relationship between the UK and Iceland, which said yesterday that it would sue the British Government over the seizure of Kaupthing’s assets.

The Government’s call to E&Y at the weekend comes as the retail magnate Sir Philip Green seeks ministerial support to help him to buy Baugur, whose assets include House of Fraser, a stake in Debenhams and high street chains, including Whistles and Karen Millen.

It is understood that Sir Philip has approached Gordon Brown, Lord Mandelson, the Business Secretary, and Treasury officials to ask them to support his move for Baugur. He wants assurances that if he buys assets from the Icelandic Government he will not have to deal with the International Monetary Fund (IMF) if Iceland, as expected, turns to the IMF to stave off national bankruptcy.

Sources said that Sir Philip and rival bidders for Baugur’s assets - including Alchemy, Permira and TPG - fear that the IMF could try to claw back businesses sold by the Icelandic Government if the country went into default.

It is understood that Alan Bloom, an Ernst & Young partner, was asked by the Government to prepare to go into Landsbanki this week as administrator if necessary. Ernst & Young, the Treasury and the Financial Services Authority declined to comment on the standby appointment.

Mr Bloom and his team are already advising on the Kaupthing administration and the administration of Heritable bank, Landsbanki’s UK subsidiary.

On Monday the British Government lifted a freezing order on Landsbanki that was preventing all the bank’s corporate clients from drawing down more money on their overdrafts. Sources said the Government feared that restricted cash flow could put some retailers at risk of bankruptcy.

It is believed that the Government wants to seize and sell on Landsbanki’s assets to cover the £588 million of local councils’ money deposited in Icelandic banks and now in the hands of the Icelandic Government. Icelandic meltdown, pages 46, 47

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