Goldman Sachs should be suspended from working for the Government until the outcome of a fraud case brought against the investment bank by US regulators is known, opposition politicians said yesterday.

The demand from the Tories and the Liberal Democrats came as the Financial Services Authority (FSA) began an investigation into the Wall Street giant's operations in London. Goldman Sachs is on a rota of investment banks that advise the Treasury about debt issuance, which has risen dramatically as the budget deficit has escalated.

Goldman is also keen to be involved in a potential fees bonanza from the privatisation of Northern Rock and the state's interests in Royal Bank of Scotland and Lloyds Banking Group, together with a rash of sales of state assets including the Tote bookmaker, the Student Loans Company and the Channel Tunnel rail link.

Yesterday, however, there were calls for Goldman to be taken off the list of approved banks pending the outcome of a fraud investigation by the US Securities and Exchange Commission (SEC). America's financial regulator claims Goldman and one of its vice-presidents, Fabrice Tourre, defrauded investors by mis-stating and omitting key facts about a financial product tied to subprime mortgages as the housing market began to collapse. Goldman denies any wrongdoing.

After Gordon Brown described the US bank as "morally bankrupt" at the weekend, Vince Cable, the Liberal Democrat Treasury spokesman, said yesterday: "The Government should not be paying for the services of a bank that is being investigated on both sides of the Atlantic. The allegations made against Goldman Sachs are extremely serious. Not a penny of taxpayers' money should be paid while these allegations hang over [the bank]."

The Conservatives also questioned whether Goldman should still be on the roster of approved banks. Mark Hoban, the shadow Financial Secretary to the Treasury, said: "If Gordon Brown believes Goldman Sachs are 'morally bankrupt', why is he still using them as advisers? ... He is lashing out at the people he was very happy to work with over the last 13 years as both Chancellor and Prime Minister."

Unions and think-tanks also lined up to criticise the company. Brendan Barber, the general-secretary of the Trades Union Congress, said: "The accusations against Goldman Sachs are the most serious legal intervention since the crash ... However, many think this case is just the tip of an iceberg, and such behaviour was systemic and widespread. It is therefore much more important to give a new impetus to the effective global regulation of banking."

Gavin Hayes, of the left-wing think-tank Compass, said: "I would go so far as to say that Goldman Sachs should be suspended from advising the Government in any professional capacity – not just on government bonds.

"[It advises] the Government on all sorts of things, including recently on Northern Rock and on privatisations. The Government plans a number of asset sales in the near-future.

"While [Goldman] is investigated by the FSA [it] should not be providing any services to government. If [it is] found guilty [it] should be sacked and barred from being awarded any public procurement contracts for the foreseeable future."

The FSA is understood to be preparing to ask why it was not told about the US investigation into Goldman and Mr Tourre before Friday night, when the SEC announced the charges. The SEC claims Goldman failed to tell investors of the involvement of the New York hedge fund Paulson & Co in selecting a portfolio of risky subprime mortgages for the "Abacus" bond it was betting against.

Mr Tourre, who is named in the SEC filing, came to London to work for Goldman Sachs in November 2008, several months after the controversial Abacus bond transaction. Traders have to be judged "fit and proper" by watchdogs before they are allowed to work in any financial centre. Goldman received a so-called "Wells notice" of the SEC investigation last summer but failed to inform the FSA. Mr Tourre was not at work yesterday but the bank has so far stood by him. While he is currently taking time off, Goldman has insisted that he is not suspended and remains an employee of the company.

The bank, whose shares have fallen sharply following the announcement of the fraud inquiry, could also come under pressure from investors for failing to notify them of the investigation in an earlier quarterly results statement, particularly if the charges result in a heavy fine followed by litigation.

Royal Bank of Scotland, which has lost more than £500m as a result of its insuring the Abacus bond against a default, is understood to be watching developments closely. It is involved through its ownership of the Dutch bank ABN Amro. RBS, which is majority owned by British taxpayers, is unlikely to act until the outcome of the charges is known, but will almost certainly sue if the SEC's case against Goldman is proven. Goldman is today expected to add fuel to the fire by unveiling plans to pay staff £3.5bn in bonuses from its first-quarter earnings.

The banking equivalent of Toyota?

Goldman Sachs has long had a reputation as the brightest penny in Wall Street's bulging moneybox. But now facing fraud allegations from America's Securities & Exchange Commission, could the company be heading for a train wreck that leaves it as the banking equivalent of Toyota?

The "firm", as it has become known, is usually the first port of call for any company contemplating taking over a rival, or needing help to fend off a potential predator. Its very name on the list of advisers has been seen as a mark of credibility – Goldman is very rarely on the losing side.

It is this fact that has begun to cause the bank problems – with a perception that puts its own interests before those of its clients. The company made huge profits during the US debt crisis by betting on a collapse in the subprime mortgage market – home loans issued to people shunned by mainstream lenders – and related financial products.

Initially this led to the company being praised, but increasingly questions have been raised about its conduct during the financial crisis.