Managers at the United Lincolnshire Hospitals NHS Trust said the year had been "very challenging".

They said this was despite the trust receiving an extra �5.5m in government health funding which had prevented the deficit rising as high as �10m.

The trust blamed the debt on pay awards and on failing to reach the targets of a financial recovery plan.

Half of the loan is due to be paid back in the next financial year with the remainder being paid back by 2007.

If I was the patient who was in receipt of the health care then I would be thinking life is only going to get better for me. Andy Leary, hospital director

Andy Leary, director of finance and performance for the trust, said: "The trust has seen a significant increase in activity in terms of patient care which clearly has got a cost associated with it.

"We have implemented a national pay modernisation agenda which also demands transformation and modernisation of the way in which services are delivered to patients.

"Clearly you implement the pay award but it takes longer for you to change services around to reflect modern health care and that's really what's causing us the difficulties."

Mr Leary could not confirm whether the cost-saving changes would lead to ward closures or job cuts.

The Unison union, which represents hospital workers, said it was concerned that the debt could force wards to close.

Unison also said it may cause problems with staff recruitment and retainment of staff.