The council-backed bus firm is looking to axe a number of its loss-making routes in the face of spiralling fuel costs and dipping passenger numbers.

But the Evening News understands that council chiefs are considering boosting the subsidies it gives to Lothian Buses or not accepting any dividend it is due to collect from the bus firm.

Lothian Buses is due to report its full accounts in the next few weeks and its dividend payment to the city council has been around £2 million in the last few years.

The rising price of diesel, a wider economic slowdown and tram roadworks have severely dented passenger numbers and profit levels at the bus firm over the last six months.

In March, Lothian Buses revealed it was facing a £4m shortfall because of increases in tax and fuel costs, as well as a Scottish Government freeze on a rebate to transport operators used to cover rises in fuel duty.

Dave Anderson, the council's director of city development, said: "The council already provides subsidies to Lothian Buses for services that are not financially viable. However, as a commercial company it is their decision on whether to continue with these services or not. We will continue to work with Lothian Buses to look at viable service options."

But campaigners urged city leaders to intervene as many passengers don't have any alternative ways of getting around the city.

Tina Woolnough, chairwoman of Blackhall Community Association, which led a recent campaign to save the number 13 service from Blackhall to Lochend, said: "Hopefully it is just a short-term problem as it would be a waste of public money to stop and start these subsidised services, particularly when many of them are just getting going and building up their numbers.

"I would hope the council does support Lothian Buses at this difficult time because it is a valuable public service they provide.

"There is no getting away from the fact that much of the trouble facing Lothian Buses is down to the tram roadworks.

"If the council can help out struggling businesses along Leith Walk then they need to look at helping Lothian Buses. It is the same principle."

Favourites for the axe are services which rely on both council subsidies and support from the more profitable routes.

Gavin Booth, chairman of passenger watchdog Bus Users UK, said: "We are obviously concerned about any potential cuts to services because often the passengers affected have no other choice other than to take the bus.

"The council may decide to intervene in some way and I would hope they will look at the social need of any services under threat.

"We are in a catch-22 here, where drivers are beginning to feel the difference in terms of increased fuel bills but they will not look to alternatives such as the bus if services are being cut."

Passengers made a record 114 million trips on Lothian Buses last year, the ninth year in a row the firm has seen passenger numbers rise.

• www.lothianbuses.com