Thames Water's efforts to secure its long-term future have suffered a significant blow, with US private equity firm KKR withdrawing from plans to invest £4 billion into the struggling utility.

The BBC reports that KKR had been named the preferred bidder to help recapitalise the UK's largest water company, which serves around a quarter of the population – mainly across London and parts of southern England.

The development raises further concern that Thames Water could collapse into a government-supervised special administration.

The water company has described the news as "disappointing", but says it will continue pursuing an alternative rescue plan.

This plan – developed by a group of its senior creditors – is said to be fully funded and ready to go.

Chairman Sir Adrian Montague said: "While KKR's withdrawal is disappointing, we continue to believe that a sustainable recapitalisation of the company is in the best interests of all stakeholders and continue to work with our creditors and stakeholders to achieve that goal."

The BBC also reports that KKR's decision to walk away coincided with the release of interim findings from a government-backed review into water industry reform, chaired by Sir Jon Cunliffe, a former deputy governor of the Bank of England.

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Sir Jon criticised the current regulatory landscape as "chaotic", warning that overlapping remits among industry regulators had created an "incoherent and expensive" system. He stressed the need for long-term investors such as pension funds to help stabilise the sector.

Sources told the BBC that the increasing politicisation of the water industry has made it harder to attract private investment.

Despite the setback, Thames Water says services to customers will continue as normal regardless of ownership changes. The company currently employs around 8,000 people.

Once debt-free at the time of its privatisation in 1989, Thames Water has since amassed around £19 billion in debt.

Earlier this year, it secured a £3 billion emergency loan to buy time while seeking new investment.

The government has said it is prepared to step in if the company can no longer operate independently.