Halifax Bank of Scotland appears to be the front runner to acquire National Irish Bank and Northern Bank with Irish Life & Permanent ruling out a deal that would require it buying both banks.

Irish Life & Permanent is not expected to make a bid for National Irish Bank if National Australia Bank insists on selling it together with Belfast-based Northern Bank.

IL&P is understood to have held tentative discussions with Bank of Ireland to launch a joint bid, with B of I seeking to buy Northern Bank, but it is unclear whether this might proceed. Bank of Ireland, which has a substantial presence in the Northern Ireland market, could run foul of regulators if it were to add Northern Bank to its operations there.

A spokesman for Irish Life & Permanent would not discuss the speculation yesterday but said that while the group has always expressed an interest in buying NIB, it was not interested in Northern Bank.

National Australia Bank's advisers, Lazard investment bank, has been reviewing the bank's European operations and is preparing a memo for potential buyers of its Irish operations.

NAB is reported to favour a deal under which it could sell NIB and Northern Bank together, something that market observers now believe puts Halifax Bank of Scotland, which owns Bank of Scotland Ireland, in pole position to acquire the banks valued at up to €1.2 billion. Others suggest it may get a better price by selling them separately. Lazard advised HBOS on its recent bid for UK bank Abbey National, which it subsequently withdrew.

The acquisition of NIB and Northern Bank would provide a branch network through which the Scottish bank could achieve its ambition of expanding into retail banking here. NIB has 60 branches in the Republic while Northern Bank has around 90.

HBOS, through its Halifax subsidiary, has about six branches in the North and fewer than 10 in the Republic. It is likely that it would drop the NIB brand in the Republic but retain the Northern brand if its bid was successful. A spokesman for HBOS refused to comment yesterday.

Other financial institutions are expected to take a look at the banks. Royal Bank of Scotland, which increased its presence in the Irish market this year through the acquisition of First Active, has been signalling it is planning to aggressively expand its market share but is thought less likely to be a bidder for NIB. It already has a large business in the north through Ulster Bank.

Sources have suggested that HBOS is keen to tie up a deal to secure the two banks within a relatively short period and it has been suggested that the bank could submit an indicative offer as early as the end of this month.

Investors have been expecting NAB's chief executive, Mr John Stewart, to make an announcement on the future of the bank's European operations, which include the Yorkshire and Clydesdale banks in the UK, in November. It is possible that the bank could confirm the sale of its Irish banks at that stage.