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The issue of whether banks' retail and investment operations should be split is to be looked at by a government inquiry into the banking sector.

The reform is one of a number of options being considered by the Independent Commission on Banking.

Critics have said that such a split could damage the UK's competitive edge and make banks leave the UK.

The ICB, chaired by Sir John Vickers, has been set up to look at financial stability and competition.

HSBC recently warned it would consider moving its headquarters from the UK if the commission recommended a break-up, while Standard Chartered has also recently questioned the future of its UK headquarters.

, it said it would also look at whether what it calls "market concentration" should be reduced - something that could result in visible changes to the way the banks operate on the High Street.

The ´óÏó´«Ã½'s business editor, Robert Peston, says that if the ICB were to decide this concentration is unhealthy, it is Lloyds - which provides 30% of all current accounts in the UK - which looks most vulnerable.

He says perhaps the most striking figure from the ICB is that the top six British banks control 88% of all deposits in this country, compared with a 68% market share for Germany's top seven banks and just 35% for America's top eight.

Other topics for scrutiny include whether banks should be restricted as to how much they should be allowed to use their own money for investment trading, as well as whether an institution should have a "living will" - a declaration of how a bank would wind itself down, should any future financial crisis fatally undermine it.

The ICB's five members have asked interested parties to give their views and are expected to question the chief executives of all of the UK's largest banks.

Sir John Vickers, the ex-chairman of the Office of Fair Trading, said there would be "single party hearings in private" to get banks to play a "constructive" part in the debate.

He pledged the questioning would be robust: "Experience shows that the risks from not asking hard questions about financial stability and competition are far greater than from doing so."

He is joined on the commission by Clare Spottiswoode, the former director-general of Ofgas, Martin Taylor, a former chief executive of Barclays, Bill Winters, the former co-chief executive of JP Morgan, and Martin Wolf, the chief economics commentator at the Financial Times.

The ICB has until September 2011 to make recommendations to the government.

Angela Knight, chief executive of the British Bankers' Association, said the body welcomed the paper set out by the ICB.

"We believe the UK industry has already taken significant steps to improve its financial position," she said.

"Our retail banks - as independent research has shown - also already provide customers with more choice, greater protection and offer better value for money than in other countries."

The chief executive of the Royal Bank of Scotland, Stephen Hester, told the ´óÏó´«Ã½ that although he was in favour of reform, concerns over the size and shape of banks were a "red herring".

"I am a strong advocate for reform... but I will also be saying let's not be distracted by red herrings," he said.

"In the financial crisis that we had, if you were a narrow bank, you were much more likely to go bust and if you were a small bank, you were much more likely to go bust - so these issues were not at the heart of the crisis."

The CBI business body said the commission should place "a high priority on maintaining the UK's place as a leading global financial centre".

"We caution against potentially damaging unilateral action, such as a move towards the separation of retail and investment banking," said Matthew Fell, CBI director of competitive markets.

"The commission needs to carefully evaluate the trade-off between tougher regulation on one hand, while encouraging choice and competition in the financial sector on the other."

The Conservative chairman of the Commons Treasury Committee, Andrew Tyrie, warned against watering down the outcome of the review.

"Sir John Vickers and his team have got to be tough and resilient," Mr Tyrie told ´óÏó´«Ã½ Radio 4's Today programme.

"They've got to make sure that they don't just become a prey to this very powerful interest group that we have in the country, which is the banks, and end up just reporting that we can muddle through."

Peter McNamara, a former managing director at Alliance & Leicester and a former head of personal banking at Lloyds, said it was unlikely that the banks would be broken up.

"The big problem that is faced is that if the legislation is put in place and it's perceived as being too draconian, then banks like Barclays and HSBC - who are such mixed organisations - may be forced to move outside the UK and that would be very serious from the UK's perspective overall," he told the ´óÏó´«Ã½.