Lloyds Banking Group may be forced to sell Halifax as punishment for the billions of pounds of state aid it has received.
The banking giant has also proposed offload its Cheltenham & Gloucester branch network. However, according to reports, the European Union competition commissioner Neelie Kroes has rejected Lloyds' attempt to limit the remedial action it must take with its plan to sell its 164-strong branch network.
Instead, the Commission is rumoured to want Lloyds to give up Halifax - a big chunk of its newly acquired empire.
Lloyds, which was recently named the UK's biggest mortgage lender with a 30% share of the market, is likely to be forced to reduce its share of the mortgage market.
In June, the banking group revealed plans to close Cheltenham & Gloucester, making 1,660 staff redundant. However, last month Lloyds made a u-turn and revealed it may no longer close the network - a move which many believe was made so it can sell the branch network instead and appease the EU state aid probe.
It has been reported the Commission may allow Lloyds to keep the Halifax name but sell a large number of its 1,000 branches.
Speculation is rife supermarket giant Tesco could be interested in buying Halifax from Lloyds.
Benny Higgins, the chief executive of Tesco Personal Finance, headed up Halifax when he worked for HBOS and is interested in boosting the financial services arm of the retailer.
A decision on Lloyds will have to be reached shortly as Kroes' term as competition commissioner is set to end next month. It was reported on Tuesday the department had nearly finished collecting all the information it needed for its decision on UK banks Royal Bank of Scotland and Lloyds.
German bank Commerzbank was recently forced to sell 45% of its balance sheet in return for EUR18 billion in state aid. The bank offered to sell its Eurohypo mortgage subsidiary and promised not to buy anything for three years.
Shares in Dutch financial services firm ING Group dropped on Tuesday after the European Commission said it was extending its review into the governments' program to guarantee ING'S EUR22 billion portfolio of American mortgage assets.