The European Commission is examining the transfer of 80,000 council homes to a private housing association.

The commission is looking at whether a �300m interest-free loan given to the new Glasgow Housing Association (GHA) constitutes state aid, which is against EU competition law.

The "subsidy" was designed to ease cash flow problems for the GHA when it takes over control of the city's council house stock in November.

The Scottish Executive said the commission had made no statement to say that the transfer was state aid and it was waiting for a final response.

Council tenants voted for the transfer

The commission confirmed that it was looking into the transfer, saying the matter appeared to warrant deeper examination.

The inquiry could last until September.

Scotland's largest public sector union, Unison, backed the EC's investigation.

The union claimed that it had warned the executive about the use of public money last December.

Joe Di Paola, Unison's Scottish Organiser for Local Government, said: "It is clear that the much-trumpeted private investment is not coming in without this significant public sweetener, and Unison thinks that an investigation is needed.

State Aid

"It is long past time that the executive recognised that housing for people is best provided by publicly accountable organisations with the proper resources."

A Scottish Executive spokesperson said: "Earlier this month the Department of Trade and Industry and the Scottish Executive have jointly made clear to the European Commission their arguments as to why the transfer of certain assets to the Glasgow Housing Association does not constitute State Aid.

"The Commission has made no statements implying that the transaction may constitute a State aid. We are still awaiting a response to our correspondence."

The executive claimed it was still working towards transferring the housing stock by the end of the year.

Dilapidated stock

Council house tenants in Glasgow voted in April to transfer ownership of their homes from the local authority to a new city-wide housing association.

In a closer ballot than had been predicted, 58% of tenants backed the transfer plans with 42% voting against.

Glasgow Housing Association (GHA) promised to carry out repairs worth �1.8bn over 10 years and begin demolishing as many as 11,000 properties to transform dilapidated stock.

The Treasury also agreed to write off �900m in housing debt accrued by the city council.