The Department for Business is believed to be considering the loan as part of a takeover by private equity fund Greybull Capital of the Scunthorpe plant in Lincolnshire.
The loan is likely to be a part of a debt-and-equity package worth up to 400-million pound that Greybull plans to pump into one of Britain's premier steelworks, sources have informed 'The Sunday Times'.
Support could come from the UK government's "Exceptional Regional Growth Fund" used to respond to economic shocks.
The deal is expected to lead to the closure of workers' final salary pension schemes and changes to terms and pay, plus supply deals slashed and back-office costs overhauled.
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The plan drawn up by managers at the 152-year-old Scunthorpe plant and consultant McKinsey is believed to hinge on retaining its coke oven and two blast furnaces to continue making 2.8 million tons of steel a year - rather than becoming a processing plant as feared.
Meanwhile, Tata Steel is believed to be close to cutting more jobs at its Port Talbot plant in south Wales, as the steel industry continues to struggle with cheap Chinese imports, falling prices and high energy costs.
It has been reported that Tata could announce hundreds of job cuts at the plant as part of a Bombay Stock Exchange filing next week.