The proportion of small British firms which were turned down for bank loans quadrupled between 2007 and 2010 and was higher than in other major European economies, data published by the Office for National Statistics on Friday showed.

The findings will add to the pressure on the government to boost lending to smaller companies as the lack of financing is seen as a major obstacle to more investment and job creation.

A survey of 19 of the 27 European Union states conducted by Eurostat and the Office for National Statistics, showed that 20.8 percent of loan applications by small and medium-sized businesses were unsuccessful in 2010, the sixth-highest of the group and up from 5.6 percent in 2007.

The financial crisis of 2007 and 2008 tipped some of Britain's largest lenders to the brink of bankruptcy, forcing the government to stump of tens of billions of pounds to save them from collapse.

Despite the huge injections of public money and record low interest rates, business lobbies are complaining about the lack of credit to small and medium-sized firms.

The survey showed that the proportion of firms whose loan applications were turned down because they lacked capital halved between 2007 and 2010, and rejections due to a insufficient collateral or guarantees fell to 26 percent from 41 percent.

However, the percentage of loans that were turned down without a specific reason given almost doubled to 15 percent.

The government has acknowledged that the difficulty in obtaining credit is holding back economic growth and earlier this year agreed a deal with Britain's five largest banks to increase lending to SMEs.

However, Project Merlin has had little impact, and earlier this week Bank of England Governor Mervyn King urged the government to raise the incentive for banks to lend.

The finance ministry is working on a credit easing plan specifically aimed at boosting the supply of money to the SME sector.

SMALL FIRMS HIT

The ONS said the percentage of successful loan applications to banks from SMEs fell to 65 percent in 2010 from 90 percent in 2007, a much sharper decline than its large European neighbours Germany, France and Italy.

And relatively young, high-growth firms, known as gazelles, suffered an even bigger fall in the success rate of their loan applications, which almost halved to 50 percent in 2010 from 90 percent in 2007.

The difficulty in obtaining bank credit appears to have driven many small companies to borrow from other sources, like friends, family, employees or even other businesses.

In 2007, 2 percent of firms sought loans from employees and other businesses, with 6 percent approaching family or friends.

By 2010, 3.3 percent of companies asked their workers for loans, and 7.4 percent called on friends or family.

The survey was based on 77,100 SMEs in all sectors excluding financial services.

(Reporting by Fiona Shaikh; editing by Stephen Nisbet)