REGENERATION work in Blackburn with Darwen could be affected as council chiefs aim to plug an estimated £5.5million hole in the town hall housing budget.

Council bosses must repay the 2006/07 overspend - which could mean interest payments totalling £500,000 per year.

The ruling coalition and opposition councillors are in dispute over how the overspend occurred - and the extent of the problem.

But Coun Salim Lorgat, executive member for regeneration and housing, is worried that the overspend will damage other projects within his portfolio.

He believes the bulk of the funding went towards housing acquisitions in the Redearth Road area, in Darwen, which has been the subject of a recent public inquiry.

The revelation follows criticism of the new coalition for a number of financial commitments, including weekly bin collections, the new Darwen Leisure Centre and equity loans for householders, by the former Labour administration.

Coun Lorgat said: "The previous administration has overspent by around £5.5 million on the housing market renewal (HMR) budget so it is a bit hypocritical that they are taking about expenditure we are going to make, which will be an investment for the future.

"The total budget for HMR this year is only £16 million so you can see what sort of percentage we are talking about."

He estimates that, even with prudential borrowing, the council will face £500,000 in interest payments before they clear the overspend from the books.

"This is basically spending money which we have never received from (regeneration agency) Elevate which needs to be paid back," added Coun Lorgat.

"The £5.5 million we owe will have an impact on the housing and regeneration portfolio."The new ruling coalition has also pegged back the total amount of equity loans, which can be secured by householders looking to relocate, to just £30,000.

But Coun Mohammed Khan, the previous housing and regeneration cabinet member, has contested Coun Lorgat's claim.

While accepting that the budget is overspent by around £4 million, he said the investment was necessary, given that many householders had made applications to move out of areas blighted by regeneration schemes.

"The problem has been that when we designated these areas, in 2005, the houses were valued at £30,000, £40,000 and £50,000," said Coun Khan.

"But house prices have risen by 17 or 18 per cent in that time and they are now worth, £40,000, £50,000 and £60,000."

Coun Khan says only a proportion of the acquisitions related to the Redearth Road area, with other purchases made in the Queen Street regeneration area in Darwen, and Infirmary estate in Blackburn.

The housing market regeneration programme across East Lancashire is designed to bring up the standards of homes in some of the region's most run-down areas. Funds are administered through regeneration agency Elevate.