The government secured agreement on Tuesday from trade unions to additional cost-cutting measures as part of a plan that also relies on cash support from state-owned utility companies and had hoped a deal with its creditor banks would help to navigate European Union rules on state aid.

Record-low coal prices and high labour costs have taken KW to the brink of bankruptcy, with its cash expected to run out this month, underscoring the deepening financial problems of Poland's coal sector.

KW's creditors include BZ WBK (>> Bank Zachodni WBK SA), the Polish business of Spain's Banco Santander (>> Banco Santander, S.A.), and France's BGZ BNP Paribas (>> Bank BGZ BNP Paribas SA) (>> BNP PARIBAS), as well as state-run lenders PKO BP (>> Powszechna Kasa Oszczednosci Bk Plski SA), BGK [BKGDK.UL] and Alior Bank (>> ALIOR BANK SA).

"The (private) banks have not agreed to the conversion. From what I know, the energy minister is now looking for another solution," one banking source said.

A second banking source said that BZ WBK has blocked the deal and that BGZ works hand in hand with Santander's Polish business.

"Also, Alior wants the same conditions as private banks were expecting to get," the second source added.

The private creditors declined to provide immediate comment.

Sources have said that those banks hold 150 million zlotys (27.69 million pound) of KW's debt.

A government source said that talks are continuing and that there is no problem with the banks. Another source close to the state-run lenders said that a deal could still materialise in a couple of weeks.

A spokeswoman for the energy ministry would only say that talks are ongoing.

It was unclear what financial terms are being discussed, but Poland's private banks are already at loggerheads with the government over the recent introduction of a tax on their assets and plans to enforce a conversion of Swiss franc mortgages into zloty loans.

The coal industry is a key challenge for Poland's ruling conservatives, whose election promises to keep the sector afloat and protect jobs needs to be squared with the economic reality that support for loss-making mines is not viable in the long term.Coal produces almost 90 percent of Poland's electricity, but the country has faced increasing international pressure to adopt cleaner methods of power generation.

KW's bonds and loans run to about 1.75 billion zlotys but the sector as a whole, which employs 100,000 people, booked a net loss of almost 5 billion zlotys last year.

(Additional reporting by Adrian Krajewski and Anna Koper; Editing by Justyna Pawlak and David Goodman)

By Marcin Goclowski and Agnieszka Barteczko