The International Olympic Committee could fine Britain up to 175 million pounds if it still continues to break air pollution laws.
The prospect of the air pollution penalty is has become a major concern for the government and the 2012 Olympic games organizers who have set a goal of making the Games "the greenest ever."
To meet the legally binding agreement, London may have to reduce traffic levels by more than 30 percent over a period of nearly a month, raising the possibility of draconian measures such as banning cars with number plates ending in odd and even numbers on alternate days.
Under the non-negotiable contract with the IOC, signed by London in 2005, the IOC can withhold 25 percent of the expected 700 million pounds broadcasting income generated from the Games should air quality levels exceed EU limits during the games, The Guardian reports.
The contract has been given a temporary extension until later this year by the EU for the reduction of levels of small particulate matter, but has so far failed to find a way to do so and London risks a 300million fine from the European commission later this year.
London is one of the most polluted cities in Europe, with official studies showing that air pollution, mainly from traffic causes more premature deaths than passive smoking and traffic accidents combined.