The government’s case for cancelling an £80m loan to a Sheffield engineering company has been undermined after it emerged that David Cameron and Nick Clegg wrongly accused its directors of being unwilling to dilute their shares.

The loan, approved by the previous government, was designed to help Sheffield Forgemasters expand further into providing parts for nuclear power stations. It was made on the basis the company raised further capital by selling 40 per cent of its shares to private equity.

Soon after taking office, the coalition cancelled the loan, saying it was unaffordable. The prime minister and his deputy told MPs the government loan would be inappropriate because the directors could have raised the money by issuing new shares and reducing their own stakes.

But Graham Honeyman, Forgemasters’ chief executive, has told the deputy prime minister he was willing to dilute his share, something Mr Clegg has since admitted in a private letter to the businessman.

Mr Clegg wrote: “[You] made clear to me your own willingness to dilute your equity share.”

The letter directly contradicts earlier statements by both Mr Clegg and Mr Cameron to the Commons. In a debate last month, Mr Clegg said: “Do I think it is the role of government to help out owners of companies who do not want to dilute their own shareholdings? No I do not.”

Mr Cameron has since repeated the point, telling MPs this month: “The question is whether it is an appropriate use of taxpayers’ money to give [the loan] to a business that could raise that money by diluting its shareholding.”

The prime minister and his deputy are now under pressure to review the decision to cancel the loan, which would have funded technology to make a pressure vessel at the centre of a nuclear power plant.

But a spokesman for Mr Clegg, a Sheffield MP, said on Monday: “The Labour government made a promise to Forgemasters which they knew they couldn’t afford to keep. This is not an issue of shareholdings, rather it is simply one of affordability.”

Pat McFadden, shadow business secretary, said: “Both Nick Clegg and David Cameron have clearly sounded off in parliament on this issue without knowing the facts. Withdrawing the proposed loan to Forgemasters showed the government is not backing up its record about manufacturing and green jobs with action.”

Although the loan was small compared with many of the business department’s schemes, it was seen as an important sign of the government’s commitment to nuclear power. It would have also been highly significant for the company, which estimates that expanding into nuclear power could double its revenues over four years.

The cancellation sparked angry exchanges between the coalition and Labour MPs, who accused the Conservatives’ Liberal Democrat partners of pursuing an anti-nuclear agenda.

Mr Clegg made clear in his letter to Mr Honeyman that he stood by the decision. The company declined to comment.

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