Government funding to unlock development of Bath's Western Riverside could be held up by a dispute over European policy.

The quango which council chiefs are hoping will help pump-prime building work on the brownfield site says it cannot consider any request for funding until a complaint from the European Commission is resolved.

The EC has complained to the Government about the awarding of a contract for development 200 miles away in York, but it is understood that it has wider concern over other schemes, including the Western Riverside.

The commission says the contract in York should have been advertised throughout Europe before being awarded in line with EU procurement policy.

There is as yet no start date for the Western Riverside development, where developer Crest has planning permission to build 2,000 homes on its land in the sector.

It has decided not to start yet because of the economic slowdown although the firm says it is committed to the scheme - which is crucial to the area meeting Government new housing targets.

Bath and North East Somerset Council is in talks with the Homes and Communities Agency over funding for the regeneration of the whole riverside site - much of which is now derelict.

But the quango - which is also the body funding the infilling of the Combe Down Mines - said it could not yet consider funding.

Spokesman David Warburton said: "The HCA has not agreed to make any grant support available for the Bath Western Riverside, and is unable to even consider any requests for investment in the overall project until the procurement issues between B&NES and the council's proposed development partner, Crest, are resolved to the satisfaction of the European Union.

"HCA is at the early stages of a discussion with Crest as to whether an early phase of development, outside the B&NES/Crest proposed development partnership, may be eligible to bid for grant support under the HCA's National Affordable Housing Programme.

"These discussions are without prejudice to the HCA's stated investment position which is that no grant funding has been formally considered, committed or programmed."

It is understood the council is confident the issue will be resolved without affecting progress in Bath and views itself as an innocent bystander in a dispute over Government interpretation of EC rules.

In a statement, it said: "The UK Government has received notification from the European Union on procurement law to which it will be replying. Bath and North East Somerset Council will be contributing to this reply for the element related to the Bath Western Riverside project.

"In the mean time, discussions continue between Bath and North East Somerset Council, the Homes and Communities Agency and the developer in respect of a first phase of the proposed development."

Paul Ellis, from the council's real estate advisers DTZ, added: "Both BLP, the council's legal procurement advisers, and DTZ, firmly support B&NES's position.  The UK Government and the European Commission must agree policy on general procurement processes when required.  Councils then have a duty to follow these procedural requirements."

The EC said it could not comment in any detail on the issue, and referred the Chronicle to the Government's Department of Communities and Local Government.

A spokesman said: "The European Commission has no information on the specific project mentioned.

"The Department of Communities and Local Government is the managing authority for all projects in England which receive funding through the EU Regional Policy.

"As managing authority, it is normal for it to require local authorities and other beneficiaries of EU funding to take all necessary actions to avoid irregularities, which could result in financial corrections if left unchecked.

"The DCLG is also entitled to insist that no other funding requests will be considered until the public procurement issue is satisfactorily dealt with, if, for example, it believes that there is a systemic problem (ie it believes other projects could be affected by the same problem).

"The EU public procurement rules are designed to ensure transparency and value for money for the taxpayer."

The DCLG referred enquiries to the Office of Government Commerce, which said: "All alleged infractions cases are addressed on their own individual issues. We cannot comment on the details of individual infraction cases that may be in progress, but the OGC always looks to respond to alleged infractions within the due timescales, working with the public body/ies concerned."

Crest said the dispute purely concerned land outside its ownership - and that 1,000 of the 2,000 homes could be built on its own landholding at the Western Riverside.

Debbie Aplin, managing director of Crest Nicholson Regeneration South West, said: “The current complaint into the EU with B&NES Council does not affect Crest Nicholson’s right and ability to bring forward development on the land it owns.   We remain fully committed to developing our site at Bath Western Riverside and continue to work with B&NES and the HCA to create a deliverable business plan despite the current economic challenges.

“In this regard, and as confirmed by the HCA, Crest is in detailed discussions with its registered social landlord partner, Somer Housing, and the HCA to finalise the affordable housing grant required to deliver the much-needed affordable houses on the land which Crest owns. We hope to finalise these discussions shortly establishing a positive way forward to commence delivery of this important regeneration and housing scheme in the near future. ”