Updates with minister comments

By Sarah Young

LONDON, June 16 (Reuters) - The British government has rejected a £10 billion ($13 billion) rescue proposal for Thames Water, increasing the likelihood that the country's largest water supplier will be nationalised.

Environment Minister Emma Reynolds said on Tuesday it was her "early view" that the proposal from creditors did not do enough to protect consumers or the environment, though she added regulator Ofwat will have the final say. A ruling is expected this summer, before Thames runs out of cash later this year.

The proposal is the only one on the table for the utility, which has been fending off financial collapse since 2023, struggling with £20 billion of debt, heavy fines for sewage pollution and ageing infrastructure.

SEWAGE BACKLASH

Reynolds told parliament the plan could unfairly push costs onto consumers and delay environmental improvements after years of sewage spills and rising bills triggered public anger.

"We will stand ready for all eventualities including SAR," she said, referring to the government's special administration regime, a form of temporary public ownership.

The creditor group, which includes Invesco, Elliott Management and Silver Point Capital, said it did not recognise Reynolds' characterisation.

A spokesperson said the proposal would not raise customer bills beyond Ofwat's plans and offered the fastest route to environmental improvements, while warning SAR would require billions of pounds in government support.

SAR would keep water flowing to Thames Water's 16 million customers in London and southern England, but could add the company's debt to the already stretched public balance sheet and deter foreign investors if large write-downs follow.

Reynolds said SAR could be triggered either by insolvency or by serious breaches of licence conditions, including environmental standards.

SYMBOL OF FAILURE

Thames Water has become a symbol of failure in Britain's privatised water sector, blamed for river pollution while previous owners loaded it with debt and paid dividends.

The government has branded the sector broken and is working on an overhaul, including plans for a new regulator to replace Ofwat.

For now, Ofwat is weighing the creditor plan, balancing record fines - including £123 million last year - against warnings that investment will dry up without regulatory leniency.

U.S. private equity firm KKR walked away from a takeover bid last year amid uncertainty over potential fines.

Reynolds also said she was not convinced by creditors' request to reduce performance standards.

Under the creditors' plan, £3.35 billion would be injected into Thames Water, alongside a new £6.55 billion debt facility, while £9.4 billion of debt would be written off.

If approved by Ofwat, the plan would require High Court sign-off, while any licence changes would be subject to public consultation.

Ofwat did not immediately respond to a request for comment. Thames Water said a market-led solution was the best way to deliver its turnaround.

($1 = 0.7453 pounds)