George Osborne and Vince Cable fear rationing of lending to small firms could reverse the recovery.
The Chancellor and business secretary are anxious rationing of lending to small businesses could lead Britain back into recession, but banks claim there is no demand for credit, the Guardian reports.
A green paper, to be rushed out by the Chancellor and business secretary before next week's parliamentary recess, will acknowledge the scale of the lending rationing crisis, which could "abort" the fragile recovery.
Cable says the paper represents Government anxiety about the flow of funds to smaller companies.
"The green paper will acknowledge the scale of the problem and how the recovery could be aborted if we don't get on top of this.
"There is a fundamental policy conflict between efforts to make the banks safer and our wish to get them lending more freely to promote growth."
British banks face £390bn 'funding gap'
British banks face a funding crisis next year as they try to refinance debts of double the amount they raised on average during the years of the credit boom, the Telegraph reports.
Banks must raise about £390bn in new debt in 2011, or more than £30bn every month, just to replace their existing funding, as they are hit by a combination of maturing bonds and the closure of major Government-guaranteed financing schemes.
Nomura analysts in a presentation yesterday, pointed to last month's Bank of England Financial Stability Report (FSR) and warned of the funding crunch facing the UK's major banks.
Banks of other major European countries face their own funding issues next year, but none has to refinance anything like the same amount as the UK banks.
British lenders must replace debt worth just over 200% of the average raised in the years 2005 to 2007.
UK deficit fears reappear as debts hits £927bn
Plans to cut Britain's mountainous national debt have been given fresh urgency by new figures showing the state of the public finances is even worse than feared, the Telegraph reports.
Public borrowing in June hit £14.5bn, well above economist expectations of £13bn.
This was despite being £200m less than last year, and was revised upward from £16bn to £17.1bn in May, according to the Office for National Statistics.
If the trend continues, the Government may miss its target for the budget deficit, raising fresh questions about the country's ability to control its £927bn debt burden.
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