Lloyds Banking Group warned shareholders yesterday that it might be forced by Brussels to sell core businesses or submit to controls on interest rates as the price of getting state aid approval.

The bank also admitted for the first time that the terms of the government scheme insuring it against losses on £260 billion of problem loans and investments might be watered down. Previously, it had called the deal non-negotiable.

Shares in the bank fell by nearly 30 per cent to 70½p, partly amid worries about these political uncertainties — although the bulk of the share slide was technical, because the date passed for eligibility to take part in its £4 billion capital-raising.

In another blow, one of the favourites to succeed Sir Victor Blank as chairman dropped out of the running. Lord Leitch, the deputy chairman, is understood to have pulled out because of other calls on his time, including chairing Bupa, the healthcare group.

The warnings were contained in the prospectus for the placing and open offer. Lloyds said that it was “currently uncertain” whether European Commission approval would be forthcoming. The group would probably be ordered to slim down its balance sheet and/or agree to other operational restrictions. This could be achieved by selling non-core businesses.

“However, [a ruling] could require the group to divest or exit core businesses.” These and any behavioural restrictions “may be materially adverse to the interests of the group”.

The Commission has already forced Commerzbank and WestLB to make drastic reforms as the price of accepting German state aid. Commerzbank, Germany’s second-biggest lender, has been ordered to cut about 45 per cent of its balance sheet assets.

It has been given five years to sell Eurohypo, its troubled property finance unit, ordered to exit property lending, reduce “volatile” investment banking and banned from taking over rivals for three years. It has also been banned from undercutting rivals by offering higher interest rates on savings deposits, where its market share exceeds 5 per cent.

WestLB was handed similarly swingeing restructuring orders in return for state protection of its €23 billion structured investment portfolio. It has been ordered to cut its asset base by half in two years.

It will have to divest WestImmo, its property finance subsidiary; readybank, its consumer credit unit; and Weberbank, its private bank. It also agreed to shut domestic and foreign offices and exit risky activities, such as proprietary trading.

Lloyds has accepted almost £300 billion in government capital, loans and guarantees as a result of the equity injection, the Credit Guarantee Scheme and the Asset Protection Scheme. The Commission has to examine this to ensure that it does not constitute unfair aid that disadvantages rivals.

Core businesses for Lloyds are mortgages, savings and current accounts, where it dominates the British market as a result of the HBO acquisition. It is also an important player in business banking, insurance and fund management.

Neelie Kroes, the European Competition Commissioner, has said that her sweeping powers to force the downsizing of state-aided banks will be tailored to reflect the size and impact of the bailout they receive.

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