Bank of Scotland, the UK's seventh biggest bank, is in talks to buy ICC Bank, for about £280 million (#355 million) in a bid to boost its presence in the Republic.

The move comes almost a month after Abbey National, the UK's second biggest mortgage lender, said that it had made an approach to Bank of Scotland about a possible £22 billion sterling (#37 billion) merger.

ICC was first put up for sale by the Government last year. However, the sale process collapsed after Bank of Ireland refused to pay more than £200 million for the institution which Government advisers had indicated was worth more than £300 million.

Although the talks with Bank of Scotland are understood to be advanced, executives close to the deal stressed that they could still fall through.

ICC chief executive, Mr Michael Quinn, was not available for comment last night but he said on Sunday that the bank was in discussions with a number of interested groups with a view to a possible sale. None of the talks had yet translated into a formal proposal, he added.

It is understood that ICC could also choose to strike a strategic alliance with another bank in place of an outright sale.

However, an increased Bank of Scotland presence here would be likely greatly to increase competition. The bank's aggressive entry into the Republic's mortgage market last year, via Bank of Scotland Mortgages Direct, forced many of its Irish competitors to cut interest rates. By September, it said it had approved #1.4 billion (£1.1 billion) worth of new mortgages here.

It is likely to keep its mortgage operation separate from ICC, which specialises in lending to small-and medium-sized businesses. But it is understood that Bank of Scotland would consider merging ICC Venture Capital, the private equity business, with its own.

It is believed that Bank of Scotland is keen to show institutional investors that it is "business as usual" at the bank, despite being in discussions with Abbey National.

Bank of Scotland declined to comment yesterday.

The Department of Finance owns 99.9 per cent of ICC, with the remainder divided among 48 shareholders.

Any offer for ICC would have to be considered by its board of directors and a recommendation made to the Minister for Finance before a sale could be agreed.

Mr McCreevy withdrew it from sale to Bank of Ireland last December after the latter indicated that £200 million was its best offer based on a due diligence examination of ICC's business. But he also told ICC's board and management to prepare for a change of ownership. He announced last month that the State was planning to invest £40 million in the bank to back up growth in its lending.

In July, ICC reported a 64 per cent increase in first-half pre-tax profit to #23.2 million (£18.3 million).

The bank cut its cost to income ratio from 47.1 per cent to 35.8 per cent, and reported a 24 per cent increase in new lending.

It increased its presence in the service industries sector and has been active in funding projects in the renewable energy sources area.