Ministers put pressure on civil servants to save MG Rover with a #110 million loan, an inquiry has been told.
But officials in the Department of Trade and Industry told politicians the money should not be given unless there was a concrete agreement that Chinese motor manufacturer SAIC would enter into a partnership with Rover.
In the end, no agreement could be reached and the deal fell through - leading to the collapse of the Birmingham firm.
Yesterday's hearing, inside the House of Commons, was conducted by the Commons Public Accounts Committee.
It followed a National Audit Office inquiry, which concluded the Department for Trade and Industry had spent #5.2 million propping up Rover for one week last April, even though the chances of saving the firm were "remote".
The money was part of a #6.5 million loan, but will never be paid back, the National Audit Office said. But before that, the Government came close to providing an even larger "bridging loan" of #110 million.
In February, the DTI said a loan would be made available as long as a joint venture agreement with SAIC had been signed.
But in April, as the collapse of MG Rover looked increasingly likely, the DTI considered providing the money even without these conditions.
The committee also discussed a section of the NAO report which stated that "in the four years to 2003 the directors received about #40 million from the business".
This referred to the directors of Phoenix Venture Holdings, which bought MG Rover for #10 from BMW in 2000.
Committee chairman Edward Leigh asked: "Why didn't the department take action when they knew the PVH directors had paid themselves #40 million?"
Sir Brian Bender, the current Permanent Secretary at the DTI, said MG Rover was a private company and the directors did not appear to have broken any rules.
MP Austin Mitchell, a member of the committee, asked him: "So if they are feathering their own nests, there is nothing you can do about it?"
Sir Brian said: "If there is evidence people are feathering their own nests we can set up investigation. That is now what the Secretary of State has done."