London/Brussels  - The European Commission might force Lloyds Banking Group to divest its holdings in Halifax Bank of Scotland (HBOS) as a penalty for taking state aid, the Times newspaper reported Wednesday.

Jonathan Todd, spokesman for EU Competition Commissioner Neelie Kroes said such reports are "pure speculation," but noted that a review is underway.

"All banks receiving restructuring aid must inter alia divest some of their activities. Contacts with the UK authorities on the restructuring of Lloyds (and RBS) are continuing but any suggestions as to which activities must be divested is pure speculation."

The commission has, in the past, set high standards for banks that seek to expand or ramp up operations after receiving state aid.

Lloyds is 43 per cent owned by the British government. It has come under fire for its purchase of HBOS last autumn, amidst the financial crisis and, some say, without regard to EU competition guidelines.

According to the Times, quoting banking industry sources, Lloyds's offer to split off Cheltenham & Gloucester and make limited disposals in Scotland has been rejected by Kroes.

The Times reported that Lloyds might be able to strike a deal to keep the Halifax brand while offloading a significant chunk of its branches.

Lloyds would not comment on the report.

The acquisition of HBOS saddled Lloyds with mammoth losses and bad debt charges, reported the Press Association. The British government is also likely to come in for further flak over its decision to waive competition concerns to hurry through the HBOS sale if the EC rules Lloyds must sell Halifax.

The combined group is the UK's largest retail bank with nearly a third of the market.  dpa