Stephen Byers: "Whatever steps necessary"

Secretary of State for Transport, Local Government and the Regions, Stephen Byers, is to study the report before deciding what action to take.

He said: "We will take whatever steps are necessary to ensure that front-line services are not put at risk and local people get the quality services they need and deserve."

Last month Mr Byers gave notice that he was "minded" to use powers under the Local Government Act 1999, which would allow him to take over any aspect of the council, including its financial management.

If Mr Byers does take financial control, it would be the first time the legislation has been used in this way.

'Act now'

Nigel Waterson, Conservative local government spokesman, said: "Years of mismanagement by Labour have pushed Hackney to the brink of bankruptcy.

"Stephen Byers is dithering in the face of Hackney's implosion and has failed to provide direction. He should act now."

Hackney Council is forecast to be in arrears of up to �21m by the end of the current financial year.

Council leader Jules Pipe said: "We have made absolutely clear that we are committed to tackling Hackney's problems by focusing on financial management and improving the performance of council services.

"What we lack is the management capacity and the money required to bridge the gap in our budget."

'Insufficient progress'

The Audit Commission said that insufficient progress had been made in implementing recommendations from a previous report, although the council had taken some "encouraging" steps.

A spokeswoman for Unison, which has staged strikes against spending cuts at the council, said: "It would be better if local authorities like Hackney were funded properly in the first place."

Hackney Council says its financial problems were triggered by the failures of the authority's revenue and benefits service.

This service had been contracted out to a private company until April of this year.