Sept. 18 (Bloomberg) -- Lloyds Banking Group Plc has been forced to abandon a move to withdraw from the U.K. government’s asset protection plan after failing to raise enough capital to meet regulatory requirements, the Daily Telegraph said.

Chief Executive Officer Eric Daniels is understood to have presented the Financial Services Authority with plans to raise more than 15 billion pounds ($25 billion), the London-based newspaper reported, without saying where it got the information.

The FSA decided Lloyds would require more capital to withstand rising bad debts and to lend an additional 28 billion pounds to businesses and households this year and next, as agreed with the government, the Telegraph said.

The FSA judgment does not rule out a hybrid Asset Protection Scheme arrangement, which would see Lloyds raising capital and using the APS for a smaller amount of insurance, the report said. Legal & General Group Plc, one of Lloyds’ largest shareholders, is believed to be supportive of reduced APS involvement, it added.

Lloyds declined to comment on the report, spokeswoman Amanda Glover said in a phone interview from London.

The pound fell to a one-week low against the dollar after the Telegraph report. The British currency declined 0.5 percent to $1.6375 as of 12:14 p.m. in Tokyo from $1.6453 in New York yesterday, after earlier reaching $1.6369, the lowest level since Sept. 8.

Lloyds sought a government rescue in the wake of Lehman Brothers Holdings Inc.’s collapse a year ago. The bank was crippled by its takeover of HBOS Plc and agreed to pay a fee of 15.6 billion pounds in March for state guarantees of losses from toxic assets. The U.K. Treasury took control of Royal Bank of Scotland Plc at about the same time.

Lloyds last month posted a first-half loss of 3.1 billion pounds after setting aside 13.4 billion pounds to cover souring commercial and real estate loans, about 80 percent of which trace their roots to HBOS.

To contact the reporter on this story: Ben Martin in London bmartin38@bloomberg.net

Last Updated: September 17, 2009 23:32 EDT