It continues to finance the existing brothel premises on the site which had been earmarked for the super-brothel expansion.

But now, having walked away, it faces a potential lawsuit for breach of contract from the promoters, sources close to the transaction said yesterday.

Delecta Limited, a publicly listed company controlled by Malcolm Day, had planned to buy the brothel through a reverse takeover. But the bank had come under pressure when the Herald revealed an investor presentation two weeks ago showing Westpac as the senior financier on the deal.

National Australia Bank was also a lender. Yesterday, in a release to the Australian Stock Exchange, Delecta said it was in the process of seeking alternative funding arrangements.

"The company has been notified that the offer from Westpac Banking Corporation to fund the acquisition of Dalway Enterprises … has been withdrawn."

Dalway was the registered owner of the property operating the Stiletto brothel, which is earmarked for expansion under Delecta's proposed fund-raising exercise.

Earlier in the year, Malcolm Day had struck a deal with Stiletto's owner, the Sydney racing identity Eddie Hayson, to build the complex, which included spas, lounges, restaurant, underground car park and a number of "multi-bed rooms".

Westpac was to have been the senior financier, providing $12.1 million to redevelop 84 and 86 Parramatta Road in combination with the existing brothel controlled by Hayson companies on the adjacent site at 82 Parramatta Road.

Westpac declined yesterday to specify why it had withdrawn its offer.