Ministers told banks on Wednesday to remove a key clause in a private sector financing agreement which would oblige the Government to repay the banks' money if the line was not completed by 2000. A banking source said that if the clause were to be removed it would wreck the deal.
The move coincided with a devastating report on the economics of the extension by Michael Portillo, Chief Secretary to the Treasury, which is on John Major's desk. Mr Portillo says other infrastructure projects represent better value.
The collapse of the Jubilee project would wreck a pounds 300m financial restructuring plan agreed by the banks for Canary Wharf, designed to allow the bankrupt office development to come out of administration and operate as a commercial company again.
It emerged that a top executive of Lloyds Bank, which is organising the financing consortium for the line, was called to Downing Street on Wednesday and told to remove the clause by John MacGregor, Secretary of State for Transport, and Sarah Hogg, the Prime Minister's adviser. Lloyds said the clause was agreed five weeks ago with London Regional Transport, subject to government approval, after discussions since last November. It denied a report from Westminster that ministers had been presented with the clause by the banks as an 11th-hour demand.
Some bankers suspect they are being set up to be blamed for the collapse of the project. One saw the ultimatum as a clear sign the Government was backtracking on the line. He said: 'They completely moved the goalposts.'
The clause would force the Government to repay all bank money, including pounds 98m agreed by the European Investment Bank, if the project runs past 2000 - more than two years after the completion date projected by LRT.
A banker said the consortium - Lloyds, Barclays, nine foreign banks including Citicorp of the United States, Commerzbank of Germany and Credit Suisse, and the EIB - saw the clause as an essential protection for their investment in case the project was not completed.
The repayment clause is known to have been in the loan contract when approved at an EIB board meeting at which a Treasury official was present. The EIB loan was hailed as the final piece of the jigsaw that would allow the line to go ahead.
The prospect of a delay may appeal to Mr Portillo, who is anxious to make public spending cuts and knows that the money earmarked for the Jubilee Line, which would run from Green Park to Stratford, would not be allowed to go to other London Transport projects but would return to the Treasury coffers.
On Tuesday, a Cabinet committee decided to allow the Bill for the Crossrail project to go ahead, but work is unlikely to start until 1996.
The cost-benefit ratio for the 10-mile Jubilee extension, expected to cost pounds 1.8bn, is poorer than for projects such as a Tube line from Chelsea to Hackney and Crossrail. However, more than pounds 100m has been spent and work could start within weeks of the final go-ahead being given, while other projects would have to wait for planning approval and design.