Lord Stevenson said HBOS could need to raise at least 12 billion in capital if investors threw out the deal and a potential 11.5 billion injection of taxpayers' cash.
If HBOS decided to go it alone, there was "no certainty" over sources of funding, he added.
And he said the bank could be forced to raise more expensive funds from the Treasury – potentially resulting in "the loss of independent or private sector status for HBOS".
But Lord Stevenson was yesterday accused of "scaremongering" by suggesting HBOS could be nationalised if shareholders reject the takeover.
In the cases of Northern Rock and Bradford and Bingley, full nationalisation meant shareholders lost almost everything, although the figures in the HBOS circular suggest that the government may only need to take a large stake in the bank rather than fully nationalise it.
Tavish Scott, leader of the Scottish Liberal Democrats, said that Lord Stevenson was scaremongering. He has called for the deal to be blocked by the UK government by reimposing competition rules, which were suspended more than six weeks ago when HBOS first hit trouble and before the UK government had to bail out Lloyds and Royal Bank of Scotland.
Mr Scott said: "The taxpayers taking a huge chunk in HBOS will save the jobs of staff and retain strong competitive banking competition across Scotland.
"Scaremongering the shareholders of HBOS is wrong and the board should resign.
"Instead they should allow people who want to keep HBOS independent to have a chance for the benefit of the bank's and Scotland's future."
Lord Stevenson said that the takeover would improve confidence and increase the bank's "long-term creditworthiness".
He added: "The acquisition should also reduce uncertainty for HBOS shareholders."
If the deal goes ahead it will create a banking giant with around 145,000 staff and 3,000 branches across the UK.
Lord Stevenson added: "Whilst Lloyds TSB believes that the combination with HBOS will generally provide enhanced opportunities for employees, there will inevitably be some rationalisation of the combined workforce as a result of the implementation of various cost synergies and operational efficiency initiatives. Consultation will take place with, among others, the recognised trade unions in respect of how this can best be achieved."
Sir Peter Burt, the former chief executive of HBOS, has been calling for the bank to remain independent. Sir Peter and former RBS chairman Sir George Mathewson have also been trying to get the current HBOS board sacked.
They said that the 12.5 billion recapitalisation figure quoted in the circular supported his case rather than Lord Stevenson's position.
Their call for an independent bank has been rejected by the board of HBOS, but has support from many politicians in Scotland and financial journals including the Economist and the Financial Times.
This is also the first time that an amount has been quoted as to how much would be needed to recapitalise HBOS to allow it to stand alone.
A merged Lloyds/HBOS bank would require 17 billion which has been offered by the UK government on the condition that the deal goes ahead.
Sir Peter and Sir George said: "We are delighted that HBOS has finally blown some of the fog away from its figures.
"This circular makes the case for us powerfully. It states that HBOS needs 12.5 billion to survive as an independent bank. This figure is only 6 per cent above the money the government has already committed to the merger, compared to the additional 27 per cent that Lloyds TSB would have to raise if a takeover does not go through.
"The Chancellor confirmed on 8 October that any eligible bank was entitled to apply for recapitalisation and has subsequently said that this is still the case.
"Lord Stevenson alleges that it is unclear on what terms this capital would be granted. The terms of any capital granted to Lloyds TSB also remain unclear.
"However, what we do know is that the government has said the terms of all capital granted to UK banks would be on a level playing field."
They added that they looked forward to a "coherent argument" from the HBOS board as to why the Lloyds TSB takeover was preferable to seeking government assistance.
"It is not clear from the circular what the justification is for Lord Stevenson's comments that the alternative is nationalisation, given the government's declared willingness to recapitalise any eligible bank," they said.
HBOS ran into trouble because it relied on wholesale money markets for a large share of its funding and saw its shares pummelled in the turmoil following the collapse of Lehman Brothers in September.
The collapse of Lehman Brothers brought a crisis in confidence in banks lending to one another which meant the wholesale market dried up.
Lloyds TSB is itself raising 5.5 billion in new funds underwritten by the taxpayer, which could see the government owning more than 40 per cent of the combined group.
However, the takeover of HBOS would see most of the key positions filled by Lloyds executives, bringing fears that influence will be lost in Edinburgh.
HBOS shareholders are due to vote on the Lloyds offer on 12 December. Lloyds TSB shareholders will vote on the proposals at a meeting on Monday.
Government bank chiefs 'to work at arm's length'
THE government will manage the taxpayers' multi-billion-pound stakes in some of the UK's biggest banks on an "arm's length" basis, it has emerged.
Ministers originally signalled that they were planning to appoint directors to the boards of the banks taking part in the 37 billion rescue package, which include Royal Bank of Scotland, Lloyds TSB and HBOS.
But the men heading the company set up to oversee the historic scheme said their job was to "manage the taxpayers' investments, not to manage the banks".
Respected City veteran Sir Philip Hampton and John Kingman, a senior treasury official, will be chairman and chief executive of UK Financial Investments, due to be operational next month.
Brown urges G20 to follow his lead
GORDON Brown, the Prime Minister, will today urge fellow world leaders to follow his example and mix tax cuts with higher government spending in the hope of kick-starting the global economy out of recession.
With tax cuts expected to be unveiled by Chancellor Alistair Darling in his Pre-Budget Report on 24 November, Mr Brown will use a meeting of the G20 group of industrialised nations to urge them to back co-ordinated action and avoid imposing trade restrictions. He said protectionism would merely lead down the road to economic ruin.
Mr Brown said that individual countries acting alone could not make sufficient difference and there was a need for a worldwide "fiscal stimulus" of tax cuts and spending increases.
"Countries should be involved, if possible, in a coordinated fiscal and monetary stimulus, if possible countries across borders agreeing that the fiscal stimulus they take will complement the stimulus in other countries," he told the Council on Foreign Relations in New York before heading on to Washington.
"Then the benefits of the stimulus don't leak in the way that they have traditionally tended to leak and you get the benefit being greater in individual countries when the action is taken coordinated together."
Mr Brown said further interest rate cuts were needed despite the unprecedented 1.5 per cent cut by the Bank of England, which took its base rate to 3 per cent. "There is scope therefore for further reductions in interest rates and that is an essential element of what we are doing," he said.
His comments came as the Eurozone – the 15 nations that use the euro – officially fell into recession. This was expected after Germany, Europe's biggest economy, went into recession on Thursday.
One in ten faces being out of a job as Britain falls into recession
ONE in ten of Britain's workforce might end up unemployed as the global financial crisis continues to wreak havoc, a new report warns today.
The survey, by the British Chambers of Commerce, raises the spectre of the highest unemployment rate for 15 years – with the jobless tally possibly even breaking three million by 2010. The last time more than one in ten was unemployed was in January 1994. Under Margaret Thatcher, it remained over three million between the second quarter of 1983 until the third quarter of 1987.
The dire analysis comes as further job losses were announced in the UK's beleaguered financial sector, with the Clydesdale bank, and its sister firm the Yorkshire bank, announcing 350 job cuts in the wake of 3,000 worldwide redundancies at Royal Bank of Scotland. Citigroup warned of 35,000 job losses worldwide.
There was also concern at the Linlithgow base of Sun Microsystems, the computer giant, after it announced between 5,000 and 6,000 global cuts – 18 per cent of its workforce – after a collapse in sales.
It marks one of the bleakest weeks in recent memory, with unions suggesting that up to 20,000 people may have been thrown out of work. Gordon Brown, the Prime Minister, faced demands from unions to be as determined to tackle rising unemployment as he was to address the banking crisis.
UK unemployment jumped 140,000 to 1.82 million this week, with 5.8 per cent of the workforce on the dole. The BCC survey says that a "severe UK downturn is now unavoidable", with a figure of three million unemployed now "very probable". It predicted that unemployment would rise to 2.95 million by the third quarter of 2010 – though it could break the three million barrier. Unemployment last hit three million in the first quarter of 1993, when John Major was prime minister.
The survey contradicts the hope of Alistair Darling, the Chancellor, that Britain would have a "short, sharp" recession in 2009 and bounce back the year after.
Erikka Askeland - Bubbly, but little good cheer at industry awards
THE country was reeling from a series of job losses, including that very day the announcement that RBS was to cut 3,000 posts worldwide.
But the organisers and sponsors of the Innovators, the annual awards shindig for Scotland's financial services industry, were determined to put a brave face on the event.
Despite the doom and gloom the champagne, the glittering cocktail dresses, the four-course dinner followed by liquers all remained. But in his speech John Campbell, the chairman of Scottish Financial Enterprise, began the night in a dolorous tone – jokes were deemed unsuitable.
Even the sponsors were having a tough night. BT, supporter of the products and services category, had also announced only a few hours before the event began that 10,000 jobs were to go – not that Phil Boyle, BT's general manager for banks and building societies, mentioned it while handing out an award.
Laura Gordon, the feisty head of the Glasgow:Edinburgh Collaboration smiled brightly despite earlier that day it having been made public she had lost her 55,000-a-year job, an apparent victim of local authority cutbacks. She said how delighted she was to be there as she announced another winner.
In the end it seemed a deliberate choice for the top award of the evening. Pensions and insurance group Aegon was the overall winner of the Innovators for its "flexible adviser remuneration" service, which helps people on low incomes access more favourable annuity deals.
The night's MC, Fred Macaulay, was reluctant to make too much of the miserable elephant in the room, instead joking about how his own industry was facing difficult times thanks to Russell Brand and Jonathan Ross.
But it was the award for products and services that was the night's focus. The award went to RBS for its stolen card cash replacement service. All Macaulay had to do was say "RBS for emergency cash" and the audience was laughing. When the winner was announced, the RBS employee picking up the award had to be coaxed onstage. He got the biggest cheer of the night.
Outside the ballroom the chat was unsurprisingly downbeat. "We might as well come out and enjoy ourselves tonight, we might not have jobs tomorrow," said one Glasgow-based wealth manager. So maybe there won't be an awards dinner next year?
"There might not be an financial services industry next year," she replied.