EU competition authorities today expressed doubts whether billions of state aid awarded to failed bank Dexia by Belgium, France and Luxembourg will turn out to be legal.

However, the European Commission extended by four months an investigation into the "orderly resolution plan" for Dexia.

It also prolonged temporary approval for €45 billion of guarantees needed to re-finance the group.

First bailed out in 2008 during the financial crisis, Dexia could not cope with the turmoil of the euro debt quagmire and in October the three stepped in to wind up the bank.

The EU Commission gave the three governments time to work out the best way to do that, but now warns that the state aid received must not perpetuate the bank's failed business model. Under plans submitted to Brussels in March, Dexia Municipal Agency (DMA) was to be sold as a going concern to the French state and partners.

But the Commission said it "considers at this stage that the sale process foreseen by the submitted plan would only be possible by virtue of the aid received by Dexia and a number of additional guarantees aimed at enabling the sale."

"In particular, the Commission doubts that the continuation of the activities of DMA is less distortive of competition and less costly for the member states than any other alternative,'' it added.

Competition chiefs said they also doubt that the temporary guarantee measure is compatible with the internal market, "especially since the new aid comes in addition to the aid already approved" as part of a February 2010 restructuring after its first taxpayer bailout.

Belgium is putting up the lion's share of the guarantees, 60.5% as against 36.5% from France and 3% from Luxembourg.