LONDON (Reuters) - Britain's finance minister, Alistair Darling, dismissed talk yesterday of a rift with the head of the country's central bank over plans to reform financial regulation and the budget deficit.

Darling and Bank of England Governor Mervyn King have appeared to be at odds recently over how supervision of banks should be split between the Treasury, the central bank and regulator the Financial Services Authority.

The row threatens to overshadow the launch next week of government proposals to tighten financial regulation in the wake of the credit crisis.

"Mervyn King, the governor, and I work very closely together," Darling told Sky News.

"These are big decisions that we have been discussing. You will see the fruits of our discussions, you will see what we are going to propose in terms of toughening up financial regulation and supervision, essential for our country ... you will see it very shortly," he said.

King said on Wednesday he had not been consulted about the proposals and said the BoE should not be held responsible for any future breakdown in financial stability if it were given no powers to intervene.

He also suggested the government had not set out credible plans on how to cut a budget deficit that will reach £175 billion in the current year, more than 12 percent of GDP, adding to the impression that he and Darling were at loggerheads.

The issue is politically sensitive, coming less than a year before a general election that the opposition Conservatives are favourites to win. The Conservatives have said they want to restore the BoE to a central role in financial regulation.

That would undo one of the key reforms introduced when Labour came to power in 1997. Labour gave the BoE independence to set interest rates but curbed its regulatory role.

Darling said he had put in place plans to reduce the budget deficit once Britain emerged from its deepest recession since World War Two.

"As a country, we have got to live within our means. That means that we are going to halve our borrowing over a five-year period," he said.

On financial regulation, Darling said he had been working closely with the BoE and the FSA.

"It'll be a joint effort and when you see it when it's published it will make a big difference I think to the quality and the nature of the regulation that we need of the financial institutions in this country," he said.

King and Darling took their disagreements over how Britain's financial sector should be regulated public last week when both addressed financiers at a dinner in London.

King said if banks were considered too big to fail, they were simply too big and suggested that retail and investment banks might have to be separated.

Darling has said it is a matter of judgment and there should be no arbitrary limits on size.

The Treasury proposals are not expected to indicate any set definition of banks being too big or an enforced separation of investment and retail banking. DeAnne Julius, a former member of the Bank's Monetary Policy Committee, said she thought there was a "communications black hole" at the heart of the tri-partite system.

"I think that there is behaviour on all sides — on all three sides — the Treasury, the FSA and the Bank of England — of guarding their own turf and jealously keeping others off," she told BBC radio.

"That's not a healthy situation to be in."