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LONDON, March 26 (Reuters) - The former chairman of Britain's Co-operative Bank, which nearly collapsed last year, said finance minister George Osborne had pressured it to buy hundreds of branches from the partially state-owned Lloyds .
Lloyds had been forced to sell the 632 branches by European regulators as part of its taxpayer rescue in 2008, at the height of the financial crisis, but its choice to sell to the Co-op attracted huge criticism, sparking allegations at the time that politicians had encouraged that choice.
The sale to the Co-op Bank had been considered a way to increase competition and boost a smaller Britain lender which was fully controlled by the mutually-owned Co-operative Group until late 2013.
However, the sale collapsed last April when Co-op Bank was found to have a 1.5 billion pound ($2.5 billion) capital shortfall that forced a full restructuring and a rescue by its bondholders.
Former chairman Paul Flowers, who was arrested last year on suspicion of supply of illegal drugs, said Osborne's Conservative Party had been determined to push the sale through so the proceeds could benefit the public finances.
"(There was) considerable (pressure) from the present government, mainly from Conservatives," Flowers said in an interview broadcast on BBC television late on Tuesday.
"They actually said that they were keen on this Co-op becoming a much more significant player with more scale.
"There was pressure certainly from (junior minister) Mark Hoban, but I believe, and know, that that originated much higher up, with the chancellor himself."
The Treasury said the deal had been a commercial matter.
"The selection of the Co-op and the decision on whether to proceed with the ... deal was a purely commercial matter for Lloyds Bank and the Co-op Bank, as the chairman and chief executive of Lloyds have consistently made clear," it said in a statement, noting the Co-op withdrew from the transaction.
It added: "Since the full extent of the situation at Co-op Bank became clear, the chancellor has ordered an independent investigation into the events at the Co-op Bank and the circumstances surrounding them."
Hoban did not immediately reply to requests for comment left with his office in the House of Commons and his constituency.
Lloyds has previously rejected the suggestion that ministers interfered in the sale.
As the state of the Co-op Bank's woes became clear, the Co-operative Group bowed to bondholder pressure in October and now owns only 30 percent of the bank with the remainder held by private investors.
Flowers, a one-time local Labour politician and Methodist preacher with no banking qualifications, quit his post as deputy chairman of Co-op Group in June at the same time as he quit the bank.
He said it was not his job to defend his appointment as chairman of the bank in 2010.
"Others made a judgment that I was the right and appropriate person to be the chair at that particular time," he added.
Flowers was arrested last November after a newspaper reported he had been filmed arranging to buy drugs.
In his first interview since the allegations were made, Flowers declined to comment on the story and said police were still looking into some issues, but he did say some of what was reported at the time was untrue. (Reporting by Costas Pitas, Andy Bruce and Kate Holton; Editing by Alison Williams)