OVERSPENDING and mounting costs could leave South Tees Hospitals NHS Trust with a £25m deficit, it has been revealed.

Health chiefs have ordered a recruitment freeze in some areas after they found they were facing a likely £13m overspend by the end of the financial year.

Mounting costs have also forced them to seek an additional £12m loan through County Durham and Tees Valley Strategic Health Authority to help pay the bills.

The cash crisis comes just 12 months after services transferred to the flagship James Cook University Hospital, Middlesbrough.

An independent watchdog has warned that services could eventually be affected at James Cook, as well as Northallerton's Friarage Hospital.

Experts from another health body - the Dorset and Somerset Health Authority - have been brought in to help address the financial situation.

An external auditor may even eventually be called in to refer the cash emergency to Health Secretary John Reid.

The Audit Commission has criticised the trust, claiming bosses had failed to take effective action in the past and had developed unrealistic budgets.

Experts at the commission now fear the position could affect services, as well as the trust's capacity to improve performance.

In her annual audit letter, district auditor Lynne Snowball says: "Given the trust's serious financial position, the trust may be unable to meet targets and sustain and develop performance in key areas of patient services unless it implements changes in the way it delivers services.

"The seriousness of the trust's financial position could result in formal action by the external auditor if there is not clear improvement."

The trust's chief executive, Simon Pleydell, said the situation was worrying but added the trust was determined to overcome the problem.

"Clearly, the money situation is very serious and we are taking it very seriously.

"If we do not get this right then we cannot move forward with confidence.

"We have got to address this in a planned way with our healthcare partners so people can have confidence that when they come to either of the hospitals, staff will be concerned with delivering high quality care.