Tory leaders have turned up the pressure on Transport Secretary Stephen Byers after a financial watchdog insisted that Railtrack had not breached rules before it was placed into administration.

The Financial Service Authority said there was no evidence that the company had failed to reveal price sensitive information.

It is clear that it was the government's actions that pulled the plug from Railtrack - not insolvency

Michael Howard Shadow chancellor

Its preliminary inquiry centred on speculation about Railtrack's knowledge prior to its entry into receivership in October and whether there could have been inadequate disclosure over its financial position.

Railtrack has always maintained that it was not insolvent when it was placed in administration, while Mr Byers has insisted that the company was in "financial meltdown".

'Groundless'

Also, Prime Minister Tony Blair told the House of Commons on 7 November that Railtrack "was not solvent".

Byers said company was in 'financial meltdown'

The FSA's findings prompted shadow chancellor Michael Howard to renew calls for an inquiry into the government's behaviour over Railtrack.

"The FSA can find no evidence that the company breached its listing rules - under which, if the directors had grounds for believing the company was insolvent, these should have been disclosed. Clearly they had no such grounds," said Mr Howard.

"It is clear that it was the government's actions that pulled the plug from Railtrack - not insolvency."

Railtrack has consistently said that there was no case to answer

David Harding Railtrack chief executive

The Department of Transport, Local Government and the Regions (DTLR) insisted that the FSA ruling "does not mean that the company (Railtrack) was solvent last October".

Railtrack said the FSA had accepted its submission that it proceeded, on the basis that no conclusion had been reached in its discussions with the government over its general financial framework.

Chief executive David Harding said: "Railtrack has consistently said that there was no case to answer. The directors kept the market fully informed and the company had nothing to hide."

Public interest

But the DTLR said: "Today's decision by the FSA not to formally investigate potential breaches of Stock Exchange rules by the then directors of Railtrack plc does not mean that the company was solvent last October."

The department's statement added: "It appears Railtrack was comfortable with its position while it was in discussion with government for more money.

"Once a decision was taken on October 5 not to provide additional public funds, the department acted immediately to inform the company.

"It also considered it necessary to protect the public interest by petitioning the court for an administration order.

Winsor: Government should request review of Railtrack's finances

"It remains the case that the court made an administration order on the basis that the company was, or was likely to become, unable to pay its debts.

Railtrack did not oppose that proposition at the time."

Meanwhile rail regulator Tom Winsor argued that if the government wanted more money to put Railtrack back on track, it should request a review of the company's finances.

Railtrack's funding has already been set for the next five years and an interim review would be needed for more funding, he told BBC Radio 4's Today programme.

If the application was successful, he could order the release of Treasury funds.

There must have a "sound and sustainable" case for this extra cash to give investors confidence and to protect the public purse, he warned.

In October 2000 Mr Winsor decided Railtrack should be given �15bn revenue over five years, but he said that after the Hatfield crash it was clear more investment would be needed.

"The fatal mistake that Railtrack made was that they were conducting secret negotiations with the government for a bail-out rather than established regulatory mechanisms being used," he said.

He believed the government had drawn back from introducing emergency legislation to curb his power to decide funding.

The government is relying on �35bn in private finance to be ploughed into the railways over the next 10 years.

On Wednesday fund managers wrote to the chancellor warning that the Railtrack decision had badly shaken investor confidence and led to a virtual "stand-off" between the government and the City and would increase the cost of future public private partnerships.

But Mr Byers insisted private companies were as keen as ever to plough much-needed cash into Britain's railways.