The government is considering taking control of Liverpool City Council in the wake of corruption allegations and the arrest of mayor Joe Anderson, Sky News understands.
Communities Secretary Robert Jenrick has confirmed he has received a report from local government inspectors investigating financial irregularities in the awarding of building contracts in the city.
According to the Telegraph, it is "likely" that Mr Jenrick will order commissioners to take over day-to-day operations in Liverpool because of a "damning indictment" of the council.
Local government inspector Max Caller was appointed by Mr Jenrick to lead the investigation.
He has reportedly already briefed MPs in the area about the findings which will be published this week
Mr Anderson remains on police bail following his arrest in December last year on suspicion of conspiracy to commit bribery and witness intimidation.
The 63-year-old has insisted that the allegations are baseless and said he is suing Merseyside Police for wrongful arrest.
Deputy mayor Wendy Simon has taken over the role of Liverpool mayor on an interim basis while the investigation continues.
Commenting on the reported takeover, Liverpool Echo political editor Liam Thorp said: "We have seen it in places like Tower Hamlets and Northamptonshire - we have not seen it on this scale.
"Liverpool is one of the core cities in the country. It is a massive city. It is a massive Labour city at the moment, which is an interesting political factor."
Likening it to Mr Jenrick pressing "the nuclear button", he said such "a full-blown takeover which would be pretty unprecedented in this scale."
He added: "That is what people are probably most angry about. The council has allowed a situation where this Conservative Government has ben given the excuse to come and takeover a city like Liverpool."
Analysis: Ministers in London should tread carefully - holding city back wouldn't go down well
By Tom Parmenter, North of England correspondent
The report that is sitting on a desk or held in an inbox in Westminster will paint a pretty depressing picture of what's been happening politically in one of the north of England's most famous cities.
While the police are still investigating the allegations of corruption and dodgy property deals in Liverpool, the findings within the Government inspector's report into what's been going on at the council will, it seems, lead to London taking direct action.
The crucial point is what level of intervention Communities Secretary Robert Jenrick will decide is needed. A full takeover with external commissioners running the council - as is being touted - would be a hard one to take after this city has made so much progress in reinventing itself over the past two decades.
There are though other options available to him - including giving the city council the right support that could help it change from within.
This is a ferociously ambitious global destination that is desperate to rebuild post pandemic.
Ministers in London should tread carefully - holding this city back or jeopardising the recovery from Covid would not go down well.