Key to London's Olympic bid was the regeneration of poorer areas

After speaking to David Higgins, chief executive of the Olympic Delivery Authority, the Observer reports that at least �2bn extra may be needed.

The Department for Culture, Media and Sport said the amount quoted by the newspaper was "pure conjecture".

A spokesman pointed out Mr Higgins had not given any new figures to the paper.

The Observer report come as the Games' budget is scrutinised by accountants KPMG.

The budget will be finalised in the summer and the paper reports concerns that the project will overshoot earlier price estimates or will fall behind schedule.

Mr Higgins, who helped prepare Sydney for the hugely successful Olympic Games in 2000 and oversaw the construction of the Bluewater shopping centre in Kent, played down the risk that taxpayers would be left with a massive bill.

'Catalyst'

At the heart of the higher costs will be plans to redevelop the Lower Lea Valley, a part of east London where the games will take place.

Currently the budget for infrastructure is set at �1bn, the paper said.

"This is a valley that has the capacity for 35,000 new homes," Mr Higgins told the Observer. "The Olympic site...is the catalyst for the entire development."

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"Back in my old job, one of the things we worked on was the expansion of Milton Keynes - 15,000 homes over a 16-year period," he explained.

"The total public sector contribution was �1.5bn just on infrastructure that was required to cope with the expansion."

Developing the Lower Lea Valley would be a more complicated project, and as a result probably more expensive, because "it's got contaminated land, it's got power lines and a river system", he explained.

And from a social point of view "it is difficult because you're putting it into a community where education levels, health levels and job participation levels are all lower than the national average".

Spread load

According to the Observer, Mr Higgins said that the private sector will help finance preparations for the Games because it will stand to benefit once the 17-day event has finished.

The Olympic Delivery Authority (ODA) is currently identifying companies that would be able to occupy Olympic facilities after the Games in order to get them to contribute to construction costs.

The paper says Mr Higgins also believes that utility companies should be asked to pay towards the cost of the new infrastructure as they will benefit from the demand that is generated by the new homes that are built.

A spokesman for the Department for Culture, Media and Sport said: "The figure quoted of �2bn is pure conjecture by the journalist.

"As the Observer itself makes clear in the article, David Higgins did not in fact give any new figures for any new infrastructure spending that might be needed.

"What he did say was that the ODA is continuing to work with government and KPMG to review and refine details of the infrastructure.