Abbey National yesterday ruled out a hostile bid for Bank of Scotland and is prepared to bow to Scottish sensitivities in order to secure a friendly deal.

Abbey, the second-largest British mortgage lender, will offer to hold an extra annual meeting in Scotland and hold board meetings in Edinburgh and London.

But Bank of Scotland said it would be difficult to strike a deal following Abbey's announcement on Friday that it was in talks about a takeover of Bank of Scotland. Until the statement, Mr Peter Burt, Bank of Scotland chief executive, was discussing a merger of equals.

"A tie-up could have made sense," said a senior Bank of Scotland executive. "Whether it still can make sense, I don't know. It is difficult to get genies back in bottles."

However, Lord Tugendhat, Abbey chairman, said combining the two banks had logic. "There is a lot in it for both sides and certainly Bank of Scotland have been extolling the virtue of this for some time," he said. "It is so self-evident a deal."

He ruled out a hostile approach, but reiterated his view that Abbey, as the larger partner, would have to have control after a deal.

"We are 60 per cent of the total size and they are 40 per cent and that has to be reflected in any outcome," he said.

Shares in Abbey fell 12p to 10.28 while Bank of Scotland rose 10p to 700p.