MG Rover deal nearing collapse

EFFORTS to save MG Rover were on the brink of collapse last night as crucial talks with China's biggest carmaker stalled.

In an ominous move, the Chinese demanded that Rover must provide 'new proposals' to address its perilous financial situation. The news followed reports yesterday that the British car firm - which employs 6,000 people - would have to call in the receivers by the end of this week unless a deal is struck.

There were also reports of a £ 400m black hole in the firm's pension fund - claims dismissed by Rover as 'completely misleading'.

The breakdown of talks is a blow for Trade Secretary Patricia Hewitt, who sent a team to China last week for make-or-break negotiations with the state-owned Shanghai Automotive Industry Corporation.

In a controversial move, she also told the Chinese that the Government was ready to hand Rover a £100m bridging loan to secure a deal. But the attempts to strike a deal ground to a halt amid Chinese fears that, even if it agrees to plough more than £200m into Rover, the firm would be technically insolvent.

One insider confirmed last night: 'The talks have stalled. The Chinese are now looking to Rover to come up with new proposals to deal with the financial question mark hanging over the firm.'

Miss Hewitt is understood to have ordered her officials to remain in Shanghai in case a last-ditch deal can be struck, but the outlook was bleak last night.

The dramatic developments came amid fears that strict EU rules could have scuppered Labour's plans to hand Rover a £100m loan. European Commission guidelines on state aid for 'firms in difficulty' make clear that any loans must be repaid within six months or risk breaching EU rules. However, the Chinese are understood to have wanted to pay back the £100m over years rather than months.

Earlier, the DTI refused to be drawn on reports that Rover was teetering on the brink of insolvency. A spokesman said: 'We are not going to get into that. The negotiations are continuing in China and we are hopeful of a successful conclusion.'

Ministers' attempts to bail out the carmaker have been hit by controversy after it emerged that the DTI's senior civil servant, Catherine Bell, had warned Miss Hewitt that the economic case for the rescue plan did not 'stack up'.

There is growing anxiety in Downing Street that Labour could face a backlash in a number of key marginal seats in the West Midlands if Rover closes before the General Election.

Conservative industry spokesman Stephen O'Brien last night reiterated his support for a deal. But he stressed that any agreement must 'provide value for the taxpayer'.