London Underground has had to delay the signing of one of the contracts for part-privatisation of the network after one of its major contractors admitted to severe financial problems.

The contract with Tubelines, one of the consortia due to upgrade tunnels, tracks and signals, was due to be signed on Thursday.

But financial problems with one of its members, engineering and building company Amey, has caused the deal to be put back for about a month.

Amey said on Thursday it will be not able to pay a �2.9m dividend to shareholders because of "insufficient distributable reserves," and is now discussing the position with its bankers.

The company may now have to sell off many of its assets in order to keep trading, or put itself up for sale.

It asked its financial advisors to "review the options for rebuilding the value of the company."

The delay is likely to embarrass the government as the public private partnership (PPP) is its preferred way of modernising the infrastructure of the Tube network.

And it will discourage other companies from taking part in the Private Finance Imitative, which the government wants

Shares fall

Amey has already had three finance directors in the past few months, with finance director Michael Kayser resigned a fortnight ago only five weeks into the job, and being replaced by Eric Tracey.

The company says it is in talks with the banks, which are being supportive, but its shares have dropped 90% since March to 26p.

In a statement, Amey said that "the delays in the Tube closure have been an albatross around Amey's neck."

But an executive director, John Biles, said that the board had been told when it made its last profit statement that there were adequate reserves.

Amey's problems have arisen because the costs of its elaborate Tube bid have to be taken as costs in this financial year, while the benefits - the payments it will receive in the future - have been delayed to the next financial year.

Tubelines, which is made up of Amey, rail contractor Jarvis and US engineering giant Bechtel, is due to take over the maintenance and upgrading of the Jubilee, Northern and Piccadilly lines.

Legal challenge

Amey's contribution is �60m and Tubelines says it has "complete confidence" the deal will go ahead.

Once the contracts are signed Transport for London will take over responsibility for managing them.

But there is still a possibility of a further legal challenge by London mayor Ken Livingstone.

He and his Transport Commissioner Bob Kiley have already spent months and �4m fighting the PPP through the courts.