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.

According to some estimates the merged company would become the second or third largest chip maker in the world.

Tough action

Fifteen banks which are owed money by LG have said they will give no fresh credit to the company and will consider calling in existing loans.

The BBC Seoul Correspondent, Andrew Wood, says that this is first time banks have taken such tough action against the country's heavily indebted conglomerates known as chaebols.

The current dispute is turning into an embarrassment for the government, as it was the first part of its plan to rationalise the country's industry in response to the economic crisis.

The massive chaebols pursued grandiose but unsustainable expansion plans during South Korea's years of economic growth. They profited from cheap loans given to them by previous governments and they became addicted to debt that has mounted to billions of dollars.

Focus of blame

Now they are being targeted with much of the blame for the country's economic problems,

Threatening to cut off credit is one way to put pressure on them and overcome their resistance to reform pressures.

But some analysts say LG is less dependent on borrowing than other big companies and may well be able to survive without fresh credit for some time.