The planned sale of 630 UK bank branches by Lloyds Banking Group to the Co-Operative Group has fallen through, leaving state-backed

Lloyds to pursue a flotation of the business. The Co-Op said today it had pulled out of the deal due to tough regulator requirements and the worsening outlook for UK economic growth.

Lloyds said it now intended to sell the network, known as "Verde", through an initial public offering. The deal has been in danger of collapse for some time, sources have said, due to concerns at Britain's regulator over the Co-op's capital strength.

There have also been worries about the complexities of breaking out the business and merging it with Co-op's platform. A flotation is unlikely to be possible until the second half of 2014, however, sources have said.

That would require Lloyds and the UK government to ask Brussels to extend its end-2013 deadline for the sale.

European regulators have demanded Lloyds sell the branches as the cost of taking a state bailout. Co-Op agreed in 2012 to buy the branches, which would have created Britain's seventh-biggest bank with about 5 percent of personal current accounts and mortgage market and about 10 percent of the branch network.

Added to Co-op's existing business, it would have made it a viable competitor to the country's "Big Four" lenders - Lloyds, HSBC, Barclays and Royal Bank of Scotland.

Lloyds said last month that it was preparing for a stock market listing of the branches as a fall-back in case the deal with the Co-op fell through.