Lloyds has confirmed the deal to sell 632 branches to the Co-operative Group is still on track.
Lord Levene's attempt to create a new force in retail banking was thwarted for a second time last night after Lloyds Banking Group said it planned to sell more than 632 branches to the Co-op in a deal worth up to £1.5bn after a last ditch bid to scupper the tie-up.
There had been fears the sale had stalled because of concerns about a deal which would triple the size of the Co-op's banking arm. But part-nationalised Lloyds said it had made "considerable progress" with the Co-op and was now in exclusive talks with the group.
Lloyds has to offload the branch estate by November 2013 as a penalty for receiving State aid at the height of the financial crisis.
The branch business accounts for a 4.6% share of the UK current account market and up to 19% of Lloyds' mortgage book, with around five million customers.
The Treasury said it welcomed the announcement by Lloyds, which it said was a "significant milestone" in efforts to improve competition in the banking sector.
A Treasury spokesman said: "Although the deal has not been finalised, we warmly welcome this development as a positive step in the process of delivering the Lloyds divestment, and the benefits that will have for competition and the mutual's sector."
Lloyds chose the Co-op as its preferred bidder in December, but sale plans have already suffered lengthy delays and initial hopes to sign a deal by the end of March were dashed due to protracted talks with regulators.
Union Unite said the delays were putting staff under pressure.
David Fleming, Unite national officer, said: "Months of speculation and negotiations have left the Lloyds banking workforce feeling vulnerable."
