The scope of the legal inquiry into government plans for Northern Rock was widened yesterday when the European Commission demanded more information about the splitting of the lender into “good” and “bad” banks.

Neelie Kroes, the EU’s Competition Commissioner, said that more details were needed to ensure legal certainty of the plan to divide the bank’s assets and pump in an extra £3 billion.

Mrs Kroes has the power to block big state subsidies if they are made without sufficient safeguards for competitiveness in the market. She said that it had become essential for the Government to provide more information than the dossier on Rock’s reorganisation that it provided on March 30.

Ministers want the bank to begin lending again to help to revive the moribund housing market, but there are fears that there could be contravention of the terms agreed with Brussels for the initial takeover of Rock, which was nationalised in February of last year.

The European Commission began investigating the rescue plan in April last year, when the Government was proposing to cut back the lending balance sheet. Under the plan to increase lending, Rock will have to slow down the repayment of government loans with more than £14 billion still outstanding.

Mrs Kroes said: “The Commission has to examine whether the changes will enable Northern Rock to return to long-term viability while avoiding undue distortions of competition.”

A spokesman for the Government said it was confident that the Rock scheme met EU conditions, and said: “We will continue to work constructively with the Commission to support their work, including their approval of Northern Rock’s revised business strategy, which we have assessed as compatible with state aid rules.”

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