Banks in South Korea have said they will deny loans to a company in one of the country's largest conglomerates, LG Semicon, if it does not cooperate with a government-sponsored rescue plan.

The plan calls for LG to merge its computer chip-making business with that of a rival conglomerate, Hyundai, but the deal has stalled in a dispute over control of the new company.

The BBC Seoul correspondent says that this is first time banks have taken such tough action against the country's heavily indebted conglomerates, and that the row is turning into an embarassrment for the government, as it was the first part of its plan to restructure the country's industry.