The German bank WestLB is set to drop its offer for Railtrack if the UK government lets it lead manage a �9bn bond issue, according to the Observer.

As lead manager, WestLB would clock up tens of million pounds in fees.

If the state-controlled bank's bidding vehicle Swiftrail pulls out, the UK government backed Network Rail would be left as the sole bidder for the new 'not for dividend' company.

Railtrack Group, which represents Railtrack shareholders, is expected to recommend Network Rail's �9bn offer.

Row brewing

A deal with WestLB would "provoke a parliamentary row, with many MPs likely to complain that the bidding process is a sham", the Observer predicted.

Accountants Ernst & Young have been running Railtrack since it was put into administration by Transport Secretary Stephen Byers in October last year.

At the time, Mr Byers said he hoped the administration period would last three to six months.

The decision to place Railtrack into administration was met with condemnation from shareholders.

Railtrack has always maintained that it was not insolvent when it was placed in administration, while Mr Byers has insisted that the company was in "financial meltdown".

Fund managers have told the government that the Railtrack decision had badly shaken investor confidence and would increase the cost of future public private partnerships.

But Mr Byers has insisted private companies were as keen as ever to plough much-needed cash into Britain's railways.