A convenient political deal allowing the government to drop its plans for the partial privatisation of the London Underground in return for the withdrawal of a £5 congestion charge for London by Ken Livingstone, was circulating in Whitehall last night.

Mr Livingstone's office said he had not been formally approached, although he was aware of its existence through senior sources at London Underground and in Whitehall.

The plan comes after a week of intense political activity in which Stephen Byers, the transport secretary, stressed that he had not performed a u-turn on the government's PPP plan for the underground.

But he said he would still go ahead with a "value for money" investigation to see whether it was worth proceeding. A political fix could appeal to Mr Livingstone because his £5 congestion charge plan for London faces increasing problems.

He has already drawn public criticism by agreeing to a list of exemptions to the charge, including hospital staff and other key public sector workers.

His advisers also believe that his plans to introduce the scheme by February 2003, less than 15 months away, is far too optimistic.

They say that the technical equipment needed to underpin the charging scheme is unlikely to be ready.

Mr Livingstone also faces hostility to the plan from within government.

The transport minister, John Spellar, is thought to regard it as an electoral liability for Labour, and would be very happy if it was ditched.

Mr Spellar has already said that ministers could use special powers to block Mr Livingstone's scheme.

"The transport department has to sign off the question of where the money that arises from the congestion charging is spent," Mr Spellar said.

Mr Livingstone may have to consider whether it is worth proceeding with congestion charging if the money it brings in does little to improve London's dire public transport position, as against having the opportunity to run the underground in the way he thinks it should be operated.

The Department of Transport rejected talk of a deal as "nonsense and totally without foundation".

However, the Treasury, which has been taking a consistently hard line on the necessity of the PPP, is now saying "wait and see".

Mr Livingstone is expected to be given the details before Christmas of the problems of introducing congestion charging on time.

A decision one way or the other is urgently needed. A senior LU executive described the tube as "getting worse day by day, with sticking plaster all over it".

A decision to drop congestion charging would be a considerable setback to another plank of the government's integrated transport policy, set out almost five years ago by John Prescott, the deputy prime minister.

Because of Mr Livingstone's enthusiasm, congestion charging for London became the vanguard of the scheme.

The plan has been tested in other cities, most notably Bristol and Leicester, but they have held back, waiting to see what happens in London.

A traffic planner said last night: "It would set back congestion charging for many years if the London scheme was dropped."