Chancellor George Osborne's aides say complete abolition of the FSA is still on the table, adding the regulator will certainly lose its independent role.
Complete scrappage of the FSA was still being considered by the Treasury, the sources said, despite support for the regulator's continued existence from the Lib Dems, according to the Guardian.
Osborne will strip the FSA of the majority of its powers in a shakeup of City regulation to be announced later this month.
The Chancellor will use his Mansion House speech on 16 June to give the Bank of England the pivotal role in preventing a re-run of the financial crisis of the last three years.
Government sources say Osborne will use his speech, one of the big set piece events of the financial calendar, to "put flesh on the bones" of the coalition agreement on financial regulation.
This called for the Bank of England to be given control of macro-prudential regulation supervision, a "big picture" assessment of prevailing conditions in the City, together with an important say in the supervision of individual banks.
Osborne remains convinced the tripartite system of regulation set up by Gordon Brown in 1997, which split control between the Bank, the Treasury and the FSA , was a key factor in problems faced by the UK during the buildup to the financial crash.
