Lloyds TSB's £18 billion takeover of HBOS faced a dramatic challenge today when two Scottish banking industry veterans urged HBOS shareholders to kick out the bank's management, install them as chairman and chief executive, and reject the Lloyds deal.

Sir George Mathewson, former boss of Royal Bank of Scotland, and Sir Peter Burt, former head of Bank of Scotland, outlined their plan in a letter sent to Lord Stevenson, the chairman of HBOS.

"The terms of the takeover [by Lloyds] are unfair to HBOS shareholders and we believe there are better options available, which the board should be exploring," the letter states.

Mathewson and Burt say that if Stevenson and Andy Hornby, HBOS' s chief executive, do not resign and appoint them in their place, they will take their case direct to shareholders.

"In the absence of your support for this, we intend to canvass shareholder support with a view to requisitioning an EGM to seek your and Andy Hornby's removal from the board and the appointment of George and myself," the letter states.

Lloyds' takeover of HBOS was agreed in September after the personal intervention of Gordon Brown. He decided to waive competition rules — a move that required parliamentary dispensation — in order to let the deal go ahead. Without it, analysts, and the government, feared HBOS might have collapsed.

As well as setting aside the compeition objections, Brown and chancellor Alistair Darling agreed to help the merger by pumping in billions of pounds of government money in new shares in the combined bank.

Resentment among HBOS shareholders has grown in recent weeks, however. They will be heavily diluted by the takeover, holding around 20% of the new merged bank.

Mathewson and Burt are looking to capitalise on this resentment, and on Scottish nationalist sentiment that wants to keep HBOS — formed from the combination of Bank of Scotland and the Halifax — a pillar of the financial industry north of the border.

They state in their letter that the terms of the Lloyds deal are not favourable to HBOS. "These figures perhaps suggest that it is Lloyds and not HBOS that is being bailed out by the takeover at the expense of HBOS shareholders."

Bankers and analysts are split about the likely success of the pair's gambit, pointing out that it will be difficult to overturn a government-sanctioned deal.

"These two, however, do have genuine experience and credibility. They might not get everything they want, but they might cause the terms of the deal to be revisited," said one banking insider.

Their move was welcomed today by the Scottish National Party. Alex Neil, MSP for Central Scotland said: “This is a very welcome development - Sir Peter and Sir George are two Scottish banking heavyweights with international reputations, and their intervention could be decisive.

“The crucial issue is protecting jobs and decision making in Scotland, and everything must be judged on that basis.

“There will be thousands of families with members working for HBOS who will be cheering on this initiative in the living rooms of Scotland, and indeed Halifax - and who take the view that losing two jobs from the very top of HBOS is better than losing thousands of jobs throughout the financial sector.”

Liberal Democrat shadow chancellor Vince Cable said the Treasury’s intervention in the banking sector had weakened the attractiveness of a merger. The former economist said: “The whole context has changed since the original Lloyds TSB takeover was minted. It seemed a good idea at the time to rescue HBOS, but since both banks now depend on Government money the rationale looks much weaker.

“The Government must explain clearly why it believes the merger should go ahead in the changed circumstances, and have an open mind towards credible new bids.”

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