The Treasury insisted it would dispose of its stake in Royal Bank of Scotland "at the right time and in the interests of the taxpayer" amid reports a pre-election share giveaway was under serious consideration.
Scandal-hit RBS - which is 81% state-owned after a £45 billion bailout in 2008 - could be ready for privatisation this year, but at present prices that would mean a huge public loss.
The Liberal Democrats have championed the idea of a share giveaway and it was reported tonight that Conservative ministers were also now examining the idea of handing it back to taxpayers.
Party sources told the Independent and Daily Mail that Chancellor George Osborne saw continued ownership as politically "untenable" amid Libor-fixing and other scandals and was keen to end the state's role soon.
An FSA spokesman said the regulator would "consider the report's findings and recommendations in detail", adding the FSA had put in place "a completely new model of supervision since the financial crisis".
The City watchdog has been accused of "serious misjudgment" in its failure to step in and block Royal Bank of Scotland's disastrous takeover of Dutch rival ABM Amro.
A report by MPs on the Treasury Select Committee slammed the Financial Services Authority (FSA) for the part it played in the failure of RBS, which saw the taxpayer stump up £45.5 billion to prevent it from collapse.
The committee said the FSA's biggest fault was not intervening to stop the "calamitous" near-£50 billion ABN takeover and is urging the Government to legislate to ensure the regulator is explicitly required to approve major bank acquisitions to prevent a repeat of the fateful deal.
The Royal Bank of Scotland expects to be fined for its role in the Libor rigging scandal, its chief executive has said.
Stephen Hester said the state-backed lender was in the process of being investigated by the Financial Services Authority over its role in attempting to manipulate the benchmark borrowing rate - a scandal that saw a number of executives resign including Barclays boss Bob Diamond.
He added: "Even though when all the Libor (fines) are out most of it is going to be around the wrongdoings of a handful of people at a number of banks. Those wrongdoings taint the whole industry beyond the handful of people and that makes it a huge problem."