LONDON - A row was brewing Thursday between state-rescued lender Royal Bank of Scotland and the British government over cuts to bonuses, amid media reports the bank's board could resign over the issue.

RBS warned Wednesday that it could struggle to hire and retain key staff after Prime Minister Gordon Brown's government demanded control of its payouts as a condition for insuring its bad debts and more state aid.

RBS, set to become 84 percent state-controlled after the latest taxpayer bailout, said government control over its bonus payments could place it at a "significant competitive disadvantage".

"This requirement may adversely impact RBS's ability to attract and retain senior managers and other key employees and thereby place RBS at a significant competitive disadvantage against its competitors," it said.

The bank, which has agreed to the condition, issued the warning in a circular to shareholders about its moves to place billions of pounds of high-risk debts into the government's toxic asset insurance scheme.

In a twist, newspaper reports said Thursday that RBS directors have been advised by the bank's lawyers to resign if the British government throws out their bonus plans for this year.

The RBS board has been advised to quit if a government veto of their bonuses means they are unable to run the bank commercially and in the best interests of all shareholders, according to the Times, quoting unnamed sources.

Finance minister Alistair Darling is prepared to veto a bonus pool at RBS if it is much higher than last year's figure of one billion pounds (1.1 billion euros, 1.66 billion dollars), the newspaper added.

"We would not expect to see any significant increases in bonus payments," a Treasury official was quoted saying.

Bonuses, blamed for encouraging excessive risk-taking that exacerbated the global economic downturn, have sparked public outrage in Britain amid huge taxpayer bailouts of some of the country's biggest banks.

Under the government's plans, the state will pump 25.5 billion pounds into RBS, which in turn will place 282 billion pounds of high-risk debts into the state-backed Asset Protection Scheme.

RBS was ravaged by the credit crunch and the takeover of Dutch giant ABN Amro at the top of the market in 2007.