The bank will have learned lessons from its experience with Alliance & Leicester, writes Siobhán Creaton, Finance Correspondent.

Three years after it was forced to withdraw from a €16.5 billion merger with Alliance & Leicester, Bank of Ireland has Abbey National within its sights. This time it is not entertaining any notion of a merger with its governor, Mr Lawrence Crowley, proposing that Bank of Ireland will take over Britain's sixth biggest financial institution.

Abbey National has been a sitting duck for such a proposal. The bank has performed abysmally over the past 18 months. It is without a chief executive and at the end of last week, its shares had hit a seven-year low.

Over the past month there has been some market speculation linking the two banks, with Bank of Ireland confirming its interest yesterday. It will be nervous that it has been forced to show its hand at such an early stage in the negotiations, which it insists have not been put on a formal footing at this stage.

The bid will be presented to the board of the British bank later this month, although no indicative price has been mentioned. Some Abbey National executives have indicated they want to reject the approach but have come under pressure to consider it from disgruntled investors. One person close to Abbey said the Bank of Ireland approach was "opportunistic" coming when its share price has collapsed.

Bank of Ireland viewed an early leak regarding its flirtation with Alliance & Leicester in 1999 as having been very unhelpful and of hampering the subsequent negotiations.

This time around Bank of Ireland will be more confident of success, although sources close to Abbey National seem to have been indicating that its approach would be spurned. There are suggestions that other banks may also be speaking to Lord Burns.

There will be much tactical manoeuvring over the coming weeks as Bank of Ireland seeks to advance its discussions and as Lord Burns tries to secure a good deal for Abbey National shareholders.

Both banks will be anxiously watching stock market reaction to the proposed takeover, which will be crucial, as the markets will either support or reject the proposal.

Investors will probably welcome this news. Abbey National needs a new management team to steer the business onto a more profitable course. Much will depend on the terms and price under which Bank of Ireland is offering to do that.

Abbey National executive chairman, Lord Burns, and the bank's board of directors, would be expected to have a viable alternative if they were to dismiss Bank of Ireland's approach. The former building society had been linked to a possible takeover bid earlier this year, from the National Australia Bank which owns the Yorkshire and Clydesdale Banks in the UK. Royal Bank of Scotland has also been mooted as a likely suitor.

Investors are increasingly concerned about the financial health of some of Abbey National's businesses. Its shares dropped sharply last week on foot of a JP Morgan report which predicted it would be forced to cut its dividend to shareholders this year and that it could be forced to write down up to £1.2 billion at its life insurer, Scottish Mutual. Abbey National is the second biggest provider of mortgages in the UK and would sit well with Bank of Ireland's other UK businesses.

It currently operates Bristol and West and has been concentrating on adding specialist financial service to its predominantly mortgage business in that market.

Together the two banks would have a stock market valuation of more than €21 billion and would create the 12th largest bank in Europe.

If completed, the takeover would also mark a significant shift in Bank of Ireland's business, effectively making the UK the biggest part of its operations.

The deal would be a coup for Bank of Ireland and would make it a major European bank far ahead of its nearest domestic rival AIB. Its chief executive, Mr Michael Soden, had prompted a debate about retaining control of the Irish banking sector within the Republic and had even championed a merger with AIB.

Some sources suggest Bank of Ireland has been researching its bid for Abbey National for some time.

It has retained Schroder Salomon Smith Barney to act as its advisors with Abbey National working with Morgan Stanley.

Bank of Ireland will be anxious to begin formal discussions as soon as possible and to finally realise its long-held ambition of securing a significant foothold in the UK.