Mervyn King, the governor of the Bank of England, said yesterday there could be more bad news in store for UK banks and businesses.

Mervyn King, the governor of the Bank of England, said yesterday there could be more bad news in store for UK banks and businesses.

"There is always in a period like this the possibility that a shock from outside the UK - one from the world economy - might create further fragilities. To some extent there are always risks, there are always fragilities.

"What I would say is that the situation now is in my view different from that in August - though it's not without risk," King said.

The governor also said that it will be several more months before banks have fully counted their losses from the collapse of the US sub-prime mortgage business, but he believes the situation is improving.

Things "are going in the right direction", he added.

The situation "has improved significantly since August when the crisis began", King said in an interview on BBC Radio Four.

"We are not back to normal in terms of a number of important financial markets, but things are improving. And I think that most people expect that we will have several more months to get through before the banks have revealed all the losses that have occurred, have taken measures to finance their obligations that result from that, but we are going in the right direction."

Interbank lending almost seized up in August as big financial institutions fretted over whether others' balance sheets could cope with massive losses made in the US mortgage market.

King denied that his refusal to join other central banks in trying to boost lending by pouring huge sums of money into the financial system had exacerbated the crisis and caused the run on Northern Rock, Britain's fifth-biggest mortgage lender.

King also said Chancellor Alistair Darling chose to veto the takeover of Northern Rock.

The governor said he told Darling that any decision to back a takeover bid of the stricken bank was a "matter for government".

He said a certain retail high street bank - widely believed to be Lloyds TSB - had wanted a £30bn loan from the Bank of England at competitive rates as part of the deal.

The governor stated: "I said to the chancellor: This is not something which a central bank can do. They don't normally finance takeovers by one company for another, let along to the tune of £30bn, which is rather a large amount of money.' "So I said: This is a matter for government, but you have to recognise that if you were to make available such a facility to one bank, you would have to make it available to any other potential bidder and, therefore, it will become public'."

Northern Rock's need for emergency cash sparked the first run on a UK bank for almost 150 years.

The Treasury said the story that Darling had vetoed a plan was wrong. "There was a general inquiry as to whether the Bank of England might provide commercial banking facilities of up to £30bn at non-penalty rates for up to two years, in the same way as an investment bank," a spokesman said.

"In any event, this general inquiry was not followed up with any detailed proposal."