Newham Council has announced it is taking legal action against Barclays Bank over hundreds of millions of pounds it took out in “toxic” loans.

New mayor Rokhsana Fiaz said she had “serious concerns” about the “mis-selling” of the lender option borrower options, known as LOBO loans, taken out by the borough before 2010.

Newham took out 27 LOBO loans, which are unregulated and typically spread over 40 to 70 years.

The council was the country’s most enthusiastic borrower, withdrawing some £563 million. Around half of its 27 LOBO loans are believed to be with Barclays, while others were secured with RBS.

Interest rates on some of the loans reached almost eight per cent, resulting in crippling repayments at a huge cost to taxpayers.

“We have serious concerns regarding the mis-selling of LOBO loans and manipulation of Libor (the London interbank offered rate) by Barclays and potentially other banks,” Ms Fiaz said.

“We continue to take all steps available to us to seek to recover money potentially denied to us at a time when local services face the prospect of being diminished because of central government’s continued austerity drive.”

When first introduced the scheme appeared to offer lower interest rates than central government borrowing. However some of Newham’s loans involved betting on interest rates going up, just as they fell to record lows.

It dumped the scheme last year and moved to traditional fixed-rate borrowing in a bid to save almost £100 million.

Joel Benjamin, from campaign group Debt Resistance UK, described the loans “toxic”.

He said: “Nearly 1,000 local residents signed a petition calling on Newham council to sue over LOBO loan mis-selling, which was delivered to Cllr Rokhsana Fiaz.

“It’s great to see the mayor acting in the public interest to hold banks to account.”

The group estimate that 240 councils across the UK took out LOBOs, borrowing more than £15 billion collectively.

This week it was revealed 14 other local authorities are taking Barclays to court over the alleged fraud.

Bristol, Greater Manchester, Oldham, Newcastle, Nottingham, Bradford, Kirklees, Leeds, Liverpool, North East Lincolnshire, Sheffield, South Gloucestershire, Walsall and West Yorkshire are believed to have joined together to launch a High Court action.

Ms Fiaz said Newham were the first to start a legal action fight.

“We are not part of the group of 14 local authorities,” she added. “We have however instigated our own legal action against Barclays. A protective claim has been filed but since this is now a legal matter and live regretfully we are not in a position to comment further.”

Barclays declined to comment.