Cornwall Council and the local health community plan to lobby the government to change the regulations on "innovative" funding after their own ground-breaking loan proposal collapsed last week.

The council wanted to use new financial freedoms gained by performing well under the comprehensive performance assessment to lend £8m to the Cornwall and Isles of Scilly health community, made up of three primary care trusts and two NHS trusts, which has debts of £31m.

The council and the health community said: "All organisations felt it was in line with government expectations to come up with innovative ways of improving public services and working in partnership."

The freedoms and flexibilities given to three-star "excellent" rated councils allow them more control over spending. In addition, they benefit from the removal of ring-fencing and do not have to submit as many plans to the government.

But the legal rules governing PCTs have prevented the council from lending the £8m, which was due to be approved this week.

Peter Davies, chairperson of the Central Cornwall PCT, said the outcome was "disappointing" and called for the issue to be considered "at national level".

Council leader John Lobb added: "Excellent councils such as Cornwall have been granted greater freedom to work in partnership with other public bodies. We could have used some of the council's financial reserves to support the Cornish health community through a difficult period."

The money, which would have been paid out over two years, was due to come from reserves and could have supported health programmes and schemes.

The health community and the council have now formed a strategic partnership group, which brings together members and senior officers of all the organisations, to try to find new ways of working.