Stephen Byers: "Minded " to act

If Mr Byers, who described the situation in Hackney as "unacceptable", does seizes financial control it would be the first time the 1999 Act has been used in this way.

The minister has also allowed permission for central government funds to be released to ensure the delivery of essential services such as education and social services which are currently at risk from the financial shortfall.

Hackney will not receive any additional government grant.

Mr Byers has already asked for advice from financial watchdog, the Audit Commission, on how to wrest the council out of its ongoing financial crisis, and is set to come to a decision by the end of next month as to what further action to take.

"Action is needed to maintain essential services," said Mr Byers. "The people of Hackney have had to endure poor quality council services for far too long.

Sweeping powers

"Frontline services must be put first. We shall take the necessary steps to ensure that this happens."

The 1999 Act gives the secretary of state sweeping powers of direct intervention.

He can direct an authority to do anything he considers is necessary or expedient to secure its compliance or he may direct an authority to transfer functions to him or to a person he has nominated.

Mr Byers took his action following warnings from senior Hackney officials that incomes was not keeping up with spending, leaving the council unable to enter into any more spending commitments.

Essential workers under threat

This would mean that payment to supply teachers, child protection workers, benefits officers and other essential workers on short-term or agency contracts could not guaranteed.

A spokesman for the transport, local government and regions department (DTLR) said it was impossible to say how much money would central government would need to extend to Hackney to plug the present gap in the borough's finances.

A series of Audit Commission reports into Hackney have raised concerns about the council's handling of its finances.

Jules Pipe, leader of Hackney Council, and Max Caller, the council's managing director, went to the government on Monday to seek a financial lifeline.

The people of Hackney have had to endure poor quality council services for far too long

Stephen Byers

The latest crisis, which involves a financial shortfall running into millions of pounds, was sparked by the failures of the council's revenues and benefits service, until recently run by the contractor ITNet, according to Mr Pipe.

"Where benefits have been paid in error by ITNet, it is the council that has to foot the bill rather than government," he said.

"We had anticipated some problems in this area and the district auditor described our estimate of the cost as 'prudent' at the time. It is now clear that the cost runs into millions.

"This has completely knocked out any hope of the council being able to cope on its own, which has led to our approach to government."

He added: "Without financial support from government we would have no means of balancing our current budget without very deep cuts in services."