A legal challenge against the Government's controversial decision to allow the takeover of HBOS by Lloyds TSB will be heard next Monday by the Competition Appeal Tribunal.

The hearing, which comes four days before HBOS shareholders are expected to approve the takeover, will be held at the tribunal's London headquarters but under Scots law.

The legal challenge is being brought by the Merger Action Group which argues that Lord Mandelson, the Business Secretary, acted unlawfully in allowing the deal to go ahead without referring it to the Competition Commission.

The group, which claims to represent more than 500 HBOS shareholders, account holders, and businessmen, and has the backing of Scottish politicians, said yesterday it was delighted that the hearing had been fast-tracked.

City sources said that the action was moving the takeover into uncharted waters and could force the HBOS board into abandoning the shareholders' vote on December 12 if the tribunal refers the takeover to the commission.

Under Rule 12 of the code of conduct for mergers laid down by the Takeover Panel, which polices such deals, such a referral would automatically cause the takeover to lapse, rendering the shareholders' vote pointless.

Justice Gerald Barling, the tribunal's president who will hear the case on Monday with two other adjudicators, yesterday refused the action group's plea for the case to be heard in Edinburgh, saying that it was impractical to move the tribunal from London at such short notice.

Lawyers for the Government and for HBOS and Lloyds TSB, who will be represented at the hearing, called for a quick verdict to be reached, probably by Tuesday lunchtime.

Sir Gerald agreed that the case should be heard under Scots law, meaning that any appeal against his verdict would be heard in the Court of Session, Edinburgh. The possibility of an appeal, which could be made by either side involved in the case, further muddies the waters for the takeover.

Malcolm Fraser, spokesman for the action group, said: “The unprecedented rate at which the appeal tribunal decided to fast-track our appeal also demonstrates how vital this case is.

“We are very confident of our legal case and we are greatly encouraged by the huge groundswell of support that our public campaign has attracted in the very short period of time since it was launched only a few days ago.”

An HBOS spokesman said: “We are pleased that the tribunal has decided to hold a hearing about this issue next week. We continue to believe that this appeal has no merit and will be unsuccessful.”

Yesterday, Eric Daniels, the Lloyds TSB chief executive, was in Edinburgh meeting politicians, including Alex Salmond, to assure them that, if approved, the merged banking group would be strongly committed to Scotland.

He announced that a committee representing Scottish business activity in retail banking, wholesale, insurance and the wealth and international divisions of the banking group will be formed to support Archie Kane, the Scottish Widows chief executive who is to be on the main board of the merged bank.

Tavish Scott, the Scottish Liberal Democrat leader, said after meeting Mr Daniels: “The Lloyds chief executive could not tell me what the impact of the takeover would be on branches and jobs across Scotland. The UK Government will own a colossal stake in this new bank. They need to explain if the loss of jobs and competition is a price worth paying.”

Mr Scott, SNP MSP Alex Neil, independent MSP Margo MacDonald and Scottish Green MSP Patrick Harvie, released a joint statement after yesterday's hearing, welcoming the decision and saying: “Finally we have a chance to have this issue heard without interference from UK government ministers.” But thay added that next Monday's hearing should be held in Edinburgh, instead of London.

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