"It became clear that this bank involvement and privatisation model de facto is not possible," he told reporters after a meeting on whether the government could get through its preferred option for handling the lender. The state would now review other options, including a state-run bad bank, and had not ruled out an insolvency, he said.

Austrian central bank Governor Ewald Nowotny said that a state-run bad bank for Hypo should not increase Austrian debt spreads. He renewed his opposition to letting Hypo go bust.

(Reporting by Michael Shields; writing by Arno Schuetze; Editing by Anthony Barker)