by Nathalie Knowles BBC Radio 4's Money Box

The British Energy crisis deepened on Friday night as the City's financial watchdog launched an investigation into the company's finances.

The Financial Services Authority is concerned British Energy may not have kept the City properly informed of the worsening situation.

The nuclear power generator warned on Thursday it faced bankruptcy unless the government was prepared to bail it out.

But the news came as a shock in many quarters of the City.

And it now transpires that just three weeks ago a British Energy Director told analysts during a conference call the company did not face a financial crisis.

Failed negotiations

British Energy is denying the director gave out false information.

It claims instead the financial situation rapidly deteriorated after failed negotiations with state owned British Nuclear Fuel to take over six of its reactors in return for a management fee.

The FSA investigation comes too late for the 220,000 individual shareholders who may get nothing after the value of their investment was wiped out on Thursday when shares were suspended at 80p.

Talks with the Government are expected to continue over the next few days.

In a statement, British Energy was upbeat about the potential outcome of the discussions but did warn shareholders "There can be no certainty that this will preserve value for investors."

"We had no alternative other than to seek government support," said Executive Chairman Robin Jeffrey.

Financial bailout

The company is believed to be asking the government for a substantial financial bailout, which could mean long-term loans of up to �1 billion.

But the government has warned there is no blank cheque to bail the company out.

Wholesale electricity prices have dropped sharply

The Trade and Industry Secretary Patricia Hewitt told BBC News: "There's no question at all of taxpayers writing a blank cheque to British Energy and its shareholders."

She said the only reason she was getting involved in discussions with British Energy was because the government had a responsibility to ensure the safety of nuclear power.

And British Energy has admitted that if the talks do fail it faces failing potential insolvency.

Wholesale prices

The energy provider has recently experienced problems because of falling wholesale electricity prices.

It made a loss of �518m in its latest financial year and it is heavily in debt.

David Porter of the Association of Electricity Producers said British Energy was not the only company in difficulty.

"We have an extremely competitive wholesale electricity market and this is a market that now leaves us with blood on the carpet," Mr Porter told BBC Radio 4's Today programme.